Private equity funds - The acquisition of a financial investor

Private equity funds are an important element of the Polish capital market. They may provide entrepreneurs willing to dynamise the development of their companies with a potential source of capital, alternative to bank loans or capital available on the public (stock exchange) market. However, like any capital, that provided by private equity funds also has its own requirements and limitations. In the following article, I would like to emphasise several issues that are of key importance for entrepreneurs in the process of acquiring this kind of investor as a business partner.

PE Funds in Poland

Different private equity funds run investment operations in our country. There are few investments made by world leaders (this is mainly due to the relatively small scale of activity of Polish companies from the perspective of the global capital market), however there is a large group of funds focused on investments in the countries of Central and Eastern Europe, where Poland is of crucial importance. Each of the funds tries (mainly for image purposes) to individually present its investment strategy, however, most of the investment criteria are similar. With regard to the above, you can try to prepare a quite universal set of key factors to which attention should be paid during the process of acquiring this type of investor for your own company.

Growth prospects

In general, cooperation with private equity investment funds is addressed to companies that have a chance to achieve above-average growth in their value, but do not have the capital to achieve this goal. Banks are very cautious in risk estimation and financing of ambitious investment programs, and they always demand proper contributions from the owner and many securities. The stock market is increasingly appreciating stable and mature companies, and the New Connect market has not met expectations yet. Private equity funds fill this gap, but in return, they expect a high rate of return, so we must have real chances to achieve significant growth in order to raise funds to invest in our company.

Business plan

A good idea alone is not enough – it must be properly prepared and presented to convince the fund to invest. And it is not about a nice presentation in Excel or a complicated financial model – there are specialists working in private equity funds who most often have the appropriate experience to preliminarily assess whether the proposal presented to them is based on real assumptions. Our business plan, which we want to present to the fund, should be based on robust market, operational and financial assumptions. We must also convince the fund that we have adequate resources to implement this business plan, or that we are able to obtain the missing resources.

Ability to cooperate with another partner

Acquiring an investor in the form of a private equity fund results in the need to share power. The vast majority of funds expect to obtain a majority stake in the company, or at least the prospect that this majority will be achieved within a strictly defined period of time. Even those funds that are able to accept their role as a minority shareholder will demand in exchange provisions in contracts that will have a significant impact on strategic decisions made by the company and will control the activities of managers. For many entrepreneurs who are not used to having to agree to a number of activities with a strong co-owner, this may be a barrier difficult to cross. On the other hand, the funds can bring not only capital to our form, but also help to implement modern management methods, thanks to which our company will operate more professionally.

Exit from investment

Each private equity fund making investments must have a predetermined exit strategy. This strategy may be a plan to enter the stock exchange or to sell shares to a strategic investor, which is to be done most often in the perspective of a few years. Allowing the fund to exit the investment, and in fact the obligation to cooperate with the entrepreneur and the company at this exit, is very often one of the main elements of the investment agreement. Any entrepreneur deciding to cooperate with a PE fund must be fully aware that acquisition by a private equity fund is the first, but not the last, step in changing the ownership structure of the company.

Investment Agreement

The introduction of the PE fund as a shareholder to our company also means the need to sign an investment agreement between the partners, which sets out a number of conditions regarding our company’s strategy, methods of its management and control, strategic decision making and shareholder security. Funds have many years of experience in signing such agreements and employ the best lawyers who care about proper protection of their clients’ interests. As entrepreneurs, we must face this challenge, and the only method is an equally professional approach to negotiations.

“Soft” factors

Sometimes, in fact very often, the final success of a given venture is determined by non-measurable factors such as trust in a partner, compatibility of characters, or shared values. The turnover of employees, especially at the higher levels of the organisational structure, in private equity funds is rather low and there is a good chance that we will cooperate with the director responsible for the project for many years. If, during the negotiation process, we encounter serious problems in mutual relations, there is a high risk that these conflicts will also occur in the future. It is also worth doing research on the current activities of the fund and ask our potential business partners for references from previous activities.

Acquisition of a private equity fund as an investor for your own company – Summary

In the case of many companies (especially those with a chance of rapid growth), it is worth considering establishing cooperation with private equity funds. They can accelerate the development of our company by financing our investment plans and can raise the level of its professionalism, thanks to which its value will increase. On the other hand, by deciding on such a step, we completely and irreversibly change the character of our company. Therefore, such a decision should be rethought before it is taken, and once it is taken, the entire process of acquiring an investor should be carried out professionally.

More information about the process of obtaining an investor can be found in our article about selling your own company.