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Private equity scouting for mid-tier opportunities

Private equity scouting for mid-tier opportunities

Mid-sized Australian businesses are firmly in the sights of private equity players in 2018, contrary to the belief that such investors exclusively target larger corporations.

Nicholas Guest, a partner with advisory firm HLB Mann Judd, told My Business that despite not being on the radar of most SME operators, private equity (PE) is a viable option for companies with strong growth prospects to accelerate their expansion plans.

“There is strong interest in the Australian private equity market for investing into good quality Australian businesses to help them grow and expand,” said Mr Guest.

“In the mid-market space that we see most opportunities, the PE buyers are looking for businesses that have opportunities for further growth … into new jurisdictions, new service offerings – something that has typically been capital constrained.”

According to Mr Guest, the most desirable businesses from a PE point of view are those that can be upscaled quickly – which tends to be more achievable with products rather than services.

“But there are cases where services businesses have been successfully invested in,” said Mr Guest.

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He added that aside from the business offering, its management is what PE investors are most keenly scouting for.

“PE typically like to invest in good quality management [beyond the founder or sole director],” said Mr Guest.

“The PE can also introduce a widening of the skill set, but they really do try and work with the existing management teams that are there.”

Mr Guest admitted that there is a stigma around private equity: that SMEs are outside of its scope, but also that it produces an unwanted intrusion into the operations of a business.

“I think there is absolutely a hesitation from some business owners to being partners with private equity. Often the founders of these businesses have been quite entrepreneurial, and the idea of having an investor who they are now going to be reporting into can be a daunting consideration for them,” he said.

“Having said that, post-transaction, I’ve had clients that have had very successful and very positive relationships with their PE investors, and they have actually really appreciated having an expanded board, which includes members of the private equity team, who’ve been able to support them and their business in the decision-making process, as well as provide them with capital to further expand their operations.”

However, Mr Guest said that gaining funds and expertise to advance growth plans in the business is only one part of the benefits private equity can deliver for a business owner.

“There’s naturally a positive in that they may be able to de-risk their own position and take some equity off the table and maybe settle some of their personal debts or help start to grow their personal wealth outside the business, while still retaining an equity interest in their business and the opportunity to hopefully realise that at a multiple at a future point in time,” he noted. 

Private equity scouting for mid-tier opportunities
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