Private equity funding for mid-market businesses, and how to attract it

Published on
4 min read

This article, from Andy Skinner, director at NorthEdge Capital and Peter McLintock, partner at Mills & Reeve, discusses what private equity is, and how to adequately prepare your business to attract funding.

What do we mean by mid-market?

To us, mid-market simply refers to the middle section of the market by size. Strip out the smallest deals – sometimes referred to as “early stage” and often associated with venture capital and the largest deals, which may be worth billions of pounds, and that is the mid-market.

What is private equity?

Private equity is a business funding mechanism used by businesses of all geographies, sizes and funding requirements to grow. Due to the size, scale and complexity of these deals, analysts and investors use various terms to segment the market. In the UK, most private equity deals are made in the middle market.

In 2020, according to KPMG data, there were 452 mid-market deals, worth more than £28 billion in total.

Is this funding available to all businesses?

Private equity is extremely active at present, with deal volumes increasing for almost every sector in H1 2021 with the possible exception of leisure and construction.

Looking at the reports of quarter one, business services and technology, media and telecom (TMT) were once again the standout performers. The former increased by 48% in H1 2021, while the latter saw an even bigger increase of 75%  Together, both these sectors accounted for 62% of total mid-market private equity deal volume in H1 2021.

It is no surprise that TMT and business services accounted for so many deals. Unlike many other sectors, the pandemic actually accelerated growth in these sectors, rather than restricting it. The widespread shift to remote working and catalytic effect of lockdowns on digital transformation boosted investment in TMT businesses and tech-enabled business services, with private equity firms focusing on backing digitally-driven businesses to keep pace with accelerated demand.

Most sectors have seen increased access to private equity with industrials being the next best performer, increasing its number of deals by almost 50% in H1 2021, as well as food and beverage, fintech, insurance businesses, life sciences, education and training, and energy businesses also seeing increases in deal volumes.

How to attract private equity funding

Andy’s years of experience has allowed him to share a number of ways to adequately prepare your business in order to be in the best position to attract private equity funding.

  1.  Be clear private equity is right for you and get internal buy in

The first step is clarity. Ensure that your business owners and business leaders are clear that private equity investment is the right route forward for growth. Negotiations and due diligence can be more straightforward if private equity has already been properly considered as part of the growth strategy.

  1.  Ensure you have the right financial information available

The due diligence process can be onerous and time-consuming. Private equity investors are going to seek a considerable amount of information. The majority of it financial, but they'll also want to know what the customers look like and the resilience of the supply chain, as well as what intellectual property and facilities the business has.

The starting point is having good financial information, good financial records and detailed information. Investors want to know what the business operations and accounting look like and what kind of reports can be produced.

Your business may not have the technology, processes and systems to produce all the financial information and business metrics to analyse the historical performance or build projections but private equity firms such as NorthEdge Capital can help extrapolate the information.

  1. Have the right management in place

Management is key. Private equity firms always look at the management and will want to meet several times and like to see a clear split of duties and responsibilities. They want to know there is a vision to develop the company over the next five years and spend the money in a way that supports growth.

Private equity firms will also take a close look at the CFO and will want to know they have the numbers ready and understand them. That individual may not always have the background, education, experience or level of analysis that PE firms would ideally want to see when we're considering investing behind the business but they can often supplement the management team by bringing additions of their own on either a non-executive or full-time basis.

  1. Seek support from trusted external advisers

Critically, outside of the management, businesses also need the right external support, including lawyers, financial advisors and supportive bankers to help assess the merits of any potential private equity deal.

Overall, private equity firms are focused on building relationships and trust with potential long term partners, understanding what the target business is looking to achieve and establishing whether they can make an appropriate return through supporting them.

  1. Preparation is key

Private equity is certainly one avenue to consider as businesses pivot to grasp opportunities and adapt to the new world post COVID-19 and its impact. But ultimately, mid-market businesses need to be sure of the strategic path PE presents and have a full game plan to ready themselves for that investment. The more prepared you are, the greater the chances that you're going to get a deal done.

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