Private Equity Investment - The Common Misconceptions

There’s no doubt that the past few years have seen political upheaval and economic uncertainty on an almost unprecedented scale.

It is often said that turbulent times like this are the nemesis of investment. But despite this challenging backdrop, at LDC we’ve continued to see plenty of management teams at the helm of businesses with a strong appetite to raise funding to deliver their mid to long term growth ambitions.

1. It’s not about taking control

Private equity isn’t as visible as other forms of funding, such as taking out a bank loan, and this element of the ‘unknown’ that can sometimes unnerve management teams. There has long been a misconception that equity investment means losing control of your business, but this is not the case.

At LDC, we look to empower not overpower management teams which is why establishing a collaborative relationship from the outset is paramount. Even when we invest for a majority shareholding, we back management teams to run their business.

A strong management team is the most important investment criteria and the role of a private equity investor is a supporting one: to provide experience and financial resource to facilitate growth.

2. Short-term vs. long-term

There is no set formula to determine the length of a private equity investment and it will naturally be influenced by external factors such as market conditions, business performance and growth opportunities.

We operate a policy of patient capital, meaning that our tenure period is governed by finding the right time, buyer and value for a business. While relationships tend to be long-term and last between five and seven years, there will also be those where an opportunity arises sooner than anticipated and is one that benefits all parties.

Ultimately, the relationship between an investor and management team relies on flexibility and it’s this approach that helps add the most value and deliver the best result for a business over the long-term.

3. Just a management buyout?

One of the most common private equity deals is a management buyout and while this can help existing management teams buy the business they are running, it is not the only route for businesses to seek an injection of capital.

Private equity investors can also support high-growth businesses looking to expand by providing development capital, which can be used to fuel product development or increase capacity within a factory, or funding to help business owners realise some of the value they have built up over time.

This flexibility of funding enables management teams to realise their growth strategy on their own terms, with an investor adding value to take a business to that next level.

4. More than just money

As well as providing capital, private equity investors offer strategic and operational support that is critical to building stronger businesses, accelerating growth and increasing shareholder value.

For investors, the most important thing is to work in partnership with management teams to maximise the value of their business. While this will include developing and implementing a strategy that improves efficiencies and drives growth, it will also involve strategic support and guidance.

As part of a deal, a private equity investor will often identify non-executive directors or a non-executive chairman to join the board. It is their job to be an objective third party, providing strategic advice and offering a different perspective on the issues being discussed around the board table.

They will have experience of working in the same sector or implementing a similar growth strategy and can draw on this expertise to provide further insight that can help management to overcome any challenges. This could be guiding a business on how to increase international sales or growing through acquisitions.

With teams based across the UK, we’re committed to continuing to invest across all sectors of the economy and our focus remains the same: helping small and mid-sized companies access the capital, strategic guidance and operational support to unlock their potential.