Why private equity funds are playing the longer game

By Jon Wilde

If you’re looking for a business exit strategy that covers all bases, the market trends in private equity investment may just tick all the right boxes for you.

This might feel like the right time to start taking a step back from the intensity of all the responsibilities of running your company, but perhaps you’re not ready to disassociate yourself completely.

Private equity could therefore be a great option – and especially now if you’re willing to accompany your investor on the journey towards achieving their targeted returns.

How can private equity investment benefit you?

As a company shareholder, you have the ability to:

Phase your exit from the business
Dilute equity and cash out
Ensure succession planning through an investment-backed buy-out
Create growth and scale to develop the company to new heights
Provide long-term sustainable growth and security
Realise your equity value through a capital event transaction

“Private equity is a great option for shareholders in a business which has a lot of potential, but need a bit of help in getting the company to where they want it to be and want to derisk to an extent now,” explains Daniel Welsby, Head of Corporate Finance Outreach at KBS.

“For a lot of business owners, the bulk of their wealth is in the business. To be able to tap into some of that wealth now, but still maintain the potential to achieve another slice of wealth in the future, is the real value of private equity.

“It differs to a trade sale where, more often than not, you will be offered a price and that’s what you receive, whereas with private equity you can benefit from that forward potential as and when it happens.”

What is the prevalent approach from PE funds heading into 2025?

Essentially, as we alluded to in the headline, private equity firms are tending to play a longer game due to the economic uncertainties that have existed in this decade so far.

Typically, a PE fund is held for 10 years, encompassing a period of raising the funds, going to market to find acquisition opportunities, making the investments, typically holding those for around three to five years, and then divesting them.

However, that three-to-five year period is being extended in many cases due to recent market conditions – in order to provide a greater degree of certainty that growth targets will be met to the benefit of all those with skin in the game.

“Recent data has shown PE funds have been holding assets for longer than would be typical,” said Kieran Lawton, Senior Investment Director of Palatine Private Equity, at the Pro-Manchester Corporate Finance Mid-Year Review.

“You look at all the things that have happened over the last five years – Brexit, Covid, wars, and the knock-on impact those have had into inflation and interest rates. There are a number of factors which have meant companies, whether they are private equity-backed or not, have had a lot to deal with.

“As a private equity house, fundamentally our job is to take investors’ money and return it at a certain multiple. If that means holding on to a company for 12 or 24 months longer than originally intended, but it’s the right thing for the company, then that’s the right thing to do.

“Personally, I don’t get too hung up about how long it’s held. It’s about getting the right return on the investment but also about doing the right thing for the company at the same time.

“The right time is when you feel it’s the right time and that might mean saying ‘I’m prepared to wait two years and take the risk that the value might decrease, or actually I’ll hold on to it because I think the market will be better, the management team want to carry on and we know where we’re trying to get to’.

“The main point is there are still deals happening and deals to be done, so rather than looking at how long private equity firms are holding on to companies, it’s more about ‘do I want private equity investment, why do I want it, am I partnering with the right person and do I believe I can work alongside them so that our journey and goals are aligned?’

“The journey and goals will change over time but as long as you all try to get to the same point, that’s the main thing.”

What’s the potential when partnering with a private equity investor?

Let’s take an example of a company for which KBS Corporate secured PE investment in the engineering sector.

EXPECTATION: The company was targeting £64million, an 8x multiple of its EBITDA
VALUE: Actual value achieved was £96million, with a £67million consideration paid Day 1
POTENTIAL: The company rolled a portion of its equity into a minority shareholding in the newco – the potential value of that retained equity after three years was £86million
VALUE OF PRIVATE EQUITY:
- The Day 1 value exceeded the client’s expectations
- The company retained a reduced shareholding with the chance to grow the business
- Additional future value was aligned to the growth achieved by the PE investment

Whether you are looking to secure resources for the next phase of business development, or thinking about your exit strategy, private equity funding can provide you with the flexibility and direction you need.

Our expert corporate finance advisers are ready to explore the options with you and find the right investor to help you achieve your goals.

You can arrange a confidential discussion regarding your company exit and private equity investment by contacting us on 0161 258 0818 or via this website.