Private Equity (PE) can offer a highly attractive alternative to a full trade sale for shareholders looking to reduce risk while retaining involvement in their business. PE investment can provide not only capital but also support, expertise, and guidance to drive further growth, helping businesses reach their full potential. Understanding how PE operates and creates value can help business owners assess if this route is the right choice for them.

What Do Private Equity Firms Do?

PE firms invest in privately owned businesses with the aim of growing their value and selling them for a return within a set period. This investment can take several forms:

• Majority Stake: The PE firm acquires a controlling interest and works closely with the management team to execute a growth strategy.
• Substantial Minority Stake: The PE firm provides capital and expertise while allowing existing shareholders to retain significant control and involvement.

PE funds raise capital from institutional investors such as banks, pension funds, and insurance companies. They often use third-party debt financing to support their investment, leveraging the balance sheet of the acquired business. A typical PE fund has a lifespan of 10 years, during which investors expect to see a return on their money.

Categories of PE Investment

PE investment can be grouped into three main categories, depending on the stage of the business:

1. Start-Up (Venture Capital)
   Venture Capital (VC) funds back early-stage concepts or ideas. These businesses are often pre-revenue and pre-profit, with funds being used to develop a product, establish infrastructure, and test the market.
2. Scale-Up
   VC or smaller PE funds invest in growing businesses that require capital to scale. Funds might be used to expand operations, enter new markets, or develop additional functions like sales or marketing.
3. Buy-Out
   Larger PE funds invest in mature businesses, often facilitating changes in ownership. These investments allow shareholders to de-risk – taking some cash off the table – while funding further expansion or significant projects.

For established business owners, the “buy-out” route often proves most appealing as it allows them to benefit from a PE partnership while continuing to grow the business.

How Do PE Firms Make Money?

Private Equity firms typically hold their investments for 3–6 years and target a return of at least 2.5x their initial investment. This return, known as a “money multiple,” is achieved by focusing on three key levers:

1. Cash Generation
   Cash generated by the business is crucial to driving value. PE firms ensure that cash is used effectively – either by accruing on the balance sheet to boost valuation at exit, paying down third-party debt, or returning funds to shareholders as dividends.
   
2. EBITDA Growth
   PE firms back management teams to deliver meaningful EBITDA growth. They provide guidance and expertise to drive operational improvements, execute acquisitions, and expand into international markets.
   – PE involvement often introduces experienced advisors and Non-Executive Directors (NEDs) to provide insight and oversight.
   – Strategic acquisitions or process improvements can rapidly grow the bottom line.
3. Multiple Arbitrage
   PE firms understand that larger, more established businesses attract higher valuations. By ensuring the business is well-prepared for its next stage of growth – through investment, streamlining, and optimization – they make it more attractive for future buyers. This approach increases the multiple applied to EBITDA at exit.
   

Why Consider Private Equity?

For business owners, partnering with PE offers a unique opportunity:

• De-Risking: PE allows shareholders to take some value out of the business while still retaining a stake and benefiting from future growth.
• Growth Support: PE firms bring financial resources, industry expertise, and a network of advisors to help execute strategic growth plans.
• Guidance and Oversight: Working alongside PE means access to proven methodologies, performance tracking, and operational improvements.

Unlike a full trade sale, where business owners often step away completely, PE investment allows you to continue playing a role while sharing the risk with experienced partners who are invested in your success.

Final Thoughts

Private Equity offers shareholders a compelling combination of risk reduction and growth acceleration. By investing alongside management, providing strategic guidance, and leveraging financial expertise, PE firms help businesses grow profits and achieve higher valuations. Whether your business needs capital for expansion, operational improvements, or acquisitions, PE can unlock significant opportunities while positioning the company for a profitable future exit.

For business owners who are ready to take the next step but don’t want to walk away entirely, PE investment can be the perfect balance of support, growth, and reward.