Whitecap has worked on numerous transactions over recent years helping PE firms making investments of £1-10m in tech-driven firms in the UK. In this blog Luke Freeman shares his thoughts on the impact of coming under PE ownership.

Private Equity has never played as big a role in the UK’s funding system, as a source of growth capital for early-stage businesses, as it has in the last 5 years.

On the supply side, low returns from more traditional investments, plus good tax incentives and dedicated financial instruments specifically designed to encourage High Net Worth (HNW) individuals to invest in growth companies, means there has never been so much privately held capital looking for a good home.

On the demand side, the explosion of digital technology in particular, and the opportunities that presents for entrepreneurial individuals to conceive of solutions to previously intractable business problems, coupled to the up front development costs and relatively high marketing costs generally associated with growth, means there is no shortage of businesses looking for injections of capital. (There may be a shortage of growth businesses who are truly investment ready, but that’s a subject for another blog.)

So, what happens when a founder-CEO and their hand-picked management team are successful in winning the backing of a venture capital fund or PE house?

The transition from prospective investee to portfolio company is not always smooth. The list of the drivers for that may include:

  • Ceding of control: Even if the business already had an effective Chair or board with Non-Executive Directors, or other shareholders, post-PE investment there will inevitably be another voice to be heard, with different expectations in terms of clarity of strategy, investment prioritisation, adherence to performance commitments, good risk management.
  • Feeling over-awed: The role of PE on the board of a growth company should be no different from any other board member – to provide independent and constructive examination of management’s recommendations and to ensure good governance in respect of financial and rick management. However in our experience, in some instances, challenges or suggestions made by PE’s board representative can be perceived by management as being freighted in a way that others’ aren’t.  This can lead to management uncomfortably feeling as though they should be following the instructions of their PE backer, rather than using them as a sounding board for their own plans and recommendations. In Eric Berne terms, a Parent-Child relationship rather than an Adult-Adult one.
  • Different Agendas: When the investment decision was made, and during the mutual courtship that preceded it, the PE house was, effectively, backing what management had already achieved and the plan they had constructed, albeit with whatever refinements arose during the due diligence process. During that process, the main point of contact with the PE house will have operated at many times as the business’ greatest advocate in discussions with their own investment committee. As the ink dries on the funding agreement, PE is already thinking about when and how to exit, at the greatest possible multiple on their investment. Management meanwhile is focused on pursuing their dream of market conquest, more customers, new product extensions. Sometimes these agendas are strongly aligned but there are many reasons why and many occasions where they may not be.
  • Prioritisation: Fast growth businesses, operating in new and rapidly changing markets have, almost by definition, hugely rich opportunity landscapes. The volume and range of potential upsides to their baseline plans is one of the things that can make a good early stage business so attractive to PE. But they can’t pursue all of these opportunities, all at once, straight after investment.

Perhaps the single-most critical part of the transition from potential investee to portfolio company is this – turning the plan and associated upsides that were in the pitch-deck into the plan you are actually going to work to post-investment. Do this together with your new Board and have as many uncomfortable conversations as are needed, early, about what success looks like for each of the different parties involved. Develop your 90 day plan and build a rationale for your areas of Focus. Choosing which of your big market opportunities you are going to tackle, in what order and (the really hard bit) which ones you are going to defer or even ignore.

Whitecap is an independent Commercial Strategy consultancy, providing Commercial Due Diligence, post-investment planning and portfolio support to PE. We also help fundraising businesses get investment ready and can provide introductions to potential investors. If we can help, or you would just like an exploratory conversation, please get in touch. [email protected]

Hopefully you’ve found this article useful. If you feel that your strategy development and strategy implementation process would benefit from independent review and challenge, please get in touch.

Established in 2012, Whitecap Consulting is a regional strategy consultancy headquartered in Leeds, with offices in Manchester, Milton Keynes, Bristol and Newcastle. We typically work with boards, executives and investors of predominantly mid-sized organisations with a turnover of c£10m-£300m, helping clients analyse, develop and implement growth strategies. Also, we work with clients across a range of sectors including Financial Services, Technology, FinTech, Outsourcing, Consumer and Retail, Property, Healthcare, Higher Education and Professional Services, and Corporate Finance and PE.