Private Equity

For some SMEs, private equity investment can be an important catalyst for business growth. It can help fund expansion plans, hire new staff, and be more creative. But what is private equity and how can it help you? More importantly, could it be the right answer for your business?  

What is private equity?

In short, private equity is a type of equity financing where an individual or organisation invests in your business. It’s an option that lets you get the capital you’re looking for without taking on any debt. In return for that funding, however, your investor(s) will become joint owners.

The ‘private’ element is because the investment isn’t being made through public markets. It’s a ‘private’ affair in that respect – an arrangement made between two parties. On one side, there’s you. And, on the other, there’s the investor who wants to be a part of your success story.

It’s quite common for smaller companies to use private equity to get the funding they need too. The British Private Equity & Venture Capital Association (BVCA) reveals how 4,300 companies in the UK are backed by private equity or venture capital. In 2019, 87% of those firms were SMEs.

Typically, private equity is a longer-term funding solution. It’s also often – but not exclusively – an option for established companies with high growth potential. As such, an investor can look to be hands-on in supporting your growth. And that can mean helping you across various areas.

 What is private equity finance for?

Like other types of commercial finance, private equity can be a versatile funding option. But your investor may state that capital must be used for a specific reason. No matter what those terms are, they’ll all be geared towards taking your business to new heights.

Business growth

Do you have high growth potential? If you’re seen as the next big thing, private equity could be the spark that ignites your ambitions. The funding you receive could be used to expand existing operations or to buy new assets. It could also help you take your business into new markets.

Management buy-ins/outs

Are you looking to buy the business you manage from existing owners? Or perhaps you want to take control of another company? Private equity is an effective way of getting the funding that’s needed for a management buy-in or buy-out.   

How private equity works

For a business owner, your private equity experience is likely to be when someone decides to invest in your company. The funding is made available to you in exchange for a stake in your business. So, it often means you’ll lose exclusive control and won’t be able to make decisions without consulting others. But that doesn’t mean it’s not a price worth paying.

In some cases, it can be a high net worth individual who wants to invest in your company. In others, a private equity fund or firm might provide the capital. Such funds or firms will source money from their own institutional investors. These can include, for example, pension funds.

The aim of private equity investment is to deliver high returns later down the line. This will be when your business has grown to such a point that investors are able to sell their stake. It’s a big reason why companies with high growth potential are the focus of private equity investors. And those investors will back your management team to make sure it happens.  

What is a private equity firm?

A private equity firm is one of the main sources of this type of investment.

In some ways, you could think of them as a middle man between a business and a collection of individuals or institutions. This is where their money comes from: pension funds, family offices, or high net worth individuals. And, with it, they’ll make investment decisions to achieve returns.

The day-to-day management of your business will still be down to you. But a private equity firm will be able to support you in different ways to help you grow. It’s not unusual for some firms to focus on specific markets or sectors in which they have the most direct experience.

Of course, there are times when you can attract investment from an individual – not a firm.

Is private equity investment right for me?

Getting finance for your business is an important step. And the decision of where to get it from is just as crucial. For SMEs that have big ideas and high growth potential, private equity could be the answer. It’s a longer-term solution and helps you get significant capital into your business.

You must first ask yourself, however, whether you’re willing to give up complete control in your business? And are you ready for what’ll be an intense period of growth? Like all types of outside funding, there are risks that come with the opportunities.

If your capital needs are more modest, private equity is unlikely to be the solution for you. This can include things like covering cashflow gaps. Or maybe you don’t need to grow at a rate of knots. Sometimes, your business might not fit the bill for prospective investors.

When private equity isn’t the answer, you still have options. At Nucleus, we specialise in a wide range of alternative finance solutions that can help SMEs do the things they want to do. To find out more, get in touch and speak to one of our specialists about your unique business needs.

Am I eligible for private equity investment?

To get private equity investment, your business almost certainly needs to meet certain criteria. This will be based on your growth potential, which can be affected by your business age or the sector you operate in. The reason is that any investor will want to see attractive returns in exchange for their initial injection of cash into your business.

The requirements can differ from investor to investor. But if they don’t see you as an attractive investment, you won’t be able to get the funding you need this way.

Private equity FAQs

What are the advantages of private equity investment?

There can be several benefits to using private equity as a way to get the funding you need for your business. The first is that, in many cases, you’re unlikely to find too many restrictions on what you can do with that. As long as the money goes towards growing your business, there’s unlikely to be too much interference in what it’s spent on.

The other major benefit, like with other forms of equity finance, is that you won’t have to take on any debt. This is important because it means there are no monthly repayments to consider. It also gives you greater flexibility. With some debt finance options, you can’t get more money until you repay what you owe. Investors, however, may be willing to provide more funds.

You can also argue that private equity firms or individuals are literally invested in your success. And that means they may be able to point you in the right direction to achieve it.

Private equity: Are there any disadvantages?

No funding option is 100% perfect. And that’s no less true for private equity investment.

Just to get finance this way can take a huge amount of time and effort. You’ll have to draw up business plans, market research, forecasts, targets, and more to prove you’re worth investing in. Isn’t this time you could better spend doing what you do best?

Next, it’ll take away some of the influence you have over your business. Want to do something? You’ll have to talk to your investors first. They get shares in your company in exchange for that investment. Therefore, they’ll have at least some say over what goes on.

And you won’t have any control over who your investors choose to sell their shares to when the time comes. That means you can’t be sure who will be coming into the business.

What do I need to consider?

Two main things need to be considered before you pursue this type of funding.

First, how much control are you willing to give up in order to get the cash you need? It’s true to say that a bigger organisation can benefit from more people at the top. But are you prepared to compromise or even back down over certain decisions?

Second, do you have a watertight business case? Are your projections all in order? Do you even have the time to pull it all together? It’ll be a lot of wasted work if it doesn’t come to anything.

You should also take the time to see if there are alternative finance solutions that can work just as well. As a funding provider with a difference, we have a variety of options to support SMEs in the UK. And our finance experts are on hand to discuss which one is best suited to you.

Get in touch and find out more today.

How much private equity can I raise?

Two things will determine how much funding you can raise. The first is how much you think you need. The second, meanwhile, is how much an investor is willing to provide. Of course, it means the second point is arguably more important.

In theory, there’s no limit to what can be raised. Private equity investment can run into millions of pounds if the conditions are right.

How long does it take to get private equity investment?

The length of time can vary. If you have a robust business case ready to go, investors might be willing to provide funding there and then. If not, it could take time to get the plans together.

It can also take time to find the right private equity fund or investor for your company.

H3: What if private equity doesn’t work for me?

Not being able to secure private equity investment isn’t the end of the world. Nor is it the only option you have. The range of alternative funding solutions that we can offer at Nucleus could mean that we have what you’re looking for.

We’re experts in helping the UK’s SMEs get to where they want to be. From short-term money worries to long-term growth ambitions, our products are tailored to support your business and its vision. Why not contact us today for a no-obligation consultation and quote?