Should growing businesses consider private equity? The use of a merger and acquisition (M&A) strategy can help a company grow. The acquisition of multiple companies – also known as a buy and build strategy – can help you capture more market share and thus become more competitive. When done correctly, the value of a newly merged business often exceeds the sum of its parts.
If a management team has decided on an M&A strategy to help the company grow, the next question is how to fund the acquisitions. Working with a private equity firm is one option. In this article, we examine the benefits of using private equity to fund a buy-and-build strategy.
Private equity services in South Africa and around the globe has amassed sizable war chests over the last decade, but high valuations make it difficult to put that capital to work effectively, necessitating a more creative approach to investing money. Funds are increasingly looking to deploy different pockets of capital for different purposes, transforming relationships with companies in the process.
According to an Ernest & Young report, private equity firms are now playing a larger role than ever in merger and acquisition transactions.
According to the report, private equity activity now accounts for 30% of the M&A market, surpassing the previous peak of 25% in 2006. Private equity firms were involved in $868 billion in acquisition deals globally during the first three quarters of 2021, putting the industry “well within striking distance of its first trillion-dollar year on record,” according to Ernest & Young.
“PE capital is becoming much more adaptable.” Not only in terms of the amount invested and the sectors involved, but also in terms of where the capital will be deployed within the capital structure and the expected return profiles.
Should growing businesses consider private equity?
Private equity services in South Africa is a method of obtaining business funding in exchange for a share of the company’s equity. With these funds, a company can plan its M&A strategy for the future. However, before embarking on the journey together, it is critical to understand your private equity partner’s motivations.
To begin, you should learn what timeline your prospective partner has in mind for your M&A strategy. It is critical that your interests coincide. There is the possibility of misalignment if your partner is eager for a quick turnaround but you believe it is better to be more patient.
You will also need to ensure that your perspectives on potential acquisition targets are broadly aligned. There may be a need to strike a balance between acquisitions that enable long-term, profitable growth and acquisitions that maximise value in the short term. It’s critical that you and your private equity backer agree on the type of deal you want to pursue.
You should also understand what role your private equity partner anticipates playing in restructuring the merged business following any acquisitions. If you bring on a majority investor, they may want to play an active role, such as reshaping the management structure, streamlining the workforce, and exercising greater financial control. While this input can help to smooth over what can be a tumultuous transition period, there is also the possibility of disagreements if you do not agree with all of the decisions. Some investors prefer a more “hands-off” approach, and if this is the type of partner you seek, you should make that clear from the start. 
When Should Growing Businesses Consider private equity for M&A
Here are some things to think about if you’re looking for private equity to fund an M&A strategy:
Investor information. Not all investors are created equal. You must conduct extensive research on the type of firm with which your company is partnering. For example, investors with experience in your industry can provide invaluable advice that can assist you in selecting and making successful acquisitions. However, as previously stated, much depends on the investor’s end goal and how it aligns with your goals.
Type of transaction. The type of deals you want to do will help you decide whether private equity funding is right for you. A horizontal merger, which involves the acquisition of two companies at the same level of the value chain, may be less complex than a vertical acquisition, which involves the acquisition of a company at a different level of the value chain.
Your approach to debt. Businesses that do not want to incur debt but are willing to give away equity are best suited for private equity investment; however, businesses with the opposite preferences may want to consider debt financing as an option.
How we can help
As a corporate finance firm with more than 100 years in combined experience in supporting businesses with start-up and growth funding in South Africa, we are here to help.
We have broad sector expertise, investing in everything from high-growth online businesses to advanced manufacturing companies, transportation and logistics businesses and others. As a boutique corporate finance advisory firm we support our clients in business growth strategies, guidance through mergers and acquisitions, access to private equity and a host of other services you might require during the process of building your business.
This article is intended for general information and use only. It is not intended to be used as advice and should not be relied on when making investment decisions. Independent advice should always be sought to determine whether a specific transaction is appropriate in light of your personal and financial circumstances.
