A shared vision for growth

Tim Smallbone, Partner at Inflexion, talks to ELITE about the role private equity funding can play in accelerating growth for businesses

Business owners who have funded the start-up and early-stage growth themselves, or with support from bank lending or angel investment, often find themselves looking elsewhere to fund the next stage of their company’s progression. For those whose end goal is IPO, M&A or exit, private equity can provide the springboard that takes the organisation to the next level.

“Private equity is a step up, from other sources of start-up funding,” says Tim Smallbone, who set up the Manchester office of the private equity house Inflexion in 2004. “Private equity is a source of funding that is provided to businesses that have reached a point of profitable growth, moved to a position of having revenue and crossed over the line of cash burn to cash generation.”

Inflexion provides equity funding from £10 million to around £250 million, for businesses making profits of £2 million and upward, in return for a minority or majority stake in the business. It’s a level of funding that can allow a business to take major steps forward, be that investment in technology, an acquisition, or expansion into a new territory.

“There are many reasons why people will want to take private equity on board,” Tim explains. “They haven’t reached a stage yet where they are of such maturity of business to be able to list their company, but they have a need for capital to replace outgoing shareholders or to invest in their future growth, which a bank is not prepared to provide. If you want to extend capital in your business where return is less certain, that's when you're going to need investment that will accept equity risk.”

Tapping into expertise

However, Tim is at pains to emphasise that private equity funding offers access to far more than just money.

“When you borrow money from the bank, you shake hands, and then they disappear, and you probably won’t see them again for ages. All you do is service the debt. It’s not like that with equity. If you get Inflexion as an investor, you will get one or two Inflexion individuals on the board, and you get our participative engagement in helping you to accelerate growth, because it’s a partnership.”

This means that the companies with which Inflexion partners are able to benefit from the full range of resources that a growing business needs: technological know-how, human capital expertise, support with M&A, and an international network that can assist with global expansion.

“We have a huge range of individuals in all sorts of specialisms, who we engage to help us accelerate the growth of a company,” Tim says. “We have Inflexion people who are employed by us to help our portfolio companies in the United States, China, India, and Brazil. We don’t charge for this support, and we find that the smaller the company, the more likely they are to take advantage of it.”

Structuring a partnership

Founders seek private equity funding for many reasons. It could be that the business has grown to a certain scale and they would like some personal financial security. Perhaps existing business partners are looking to exit, or the business has outgrown them. Or maybe there is a significant step change in the business: the opportunity to buy a competitor, for instance, or to expand into a new market. But how should an entrepreneur go about selecting a private equity partner and preparing the business for their investment?

“You'll need a business plan,” Tim says. “You will need to be diligent and prepared. That's a well-trodden path by us and by the advisers out there, so take lots of advice from trusted sources and be really clear in your mind what you're doing and why you're doing it. Think about what story you’re going to tell the equity house. What’s your reason for getting them involved? Which individuals are going to deliver that plan? It’s perfectly fine if you don’t have a full team in place; solving team problems is part of what we do.

“It’s very easy to find equity houses but finding the right one is a tricky business. It’s a matter of what sort of partner you want. We do a relatively small number of investments – eight to ten a year – and they are all important to us. We are looking for restless entrepreneurs who are ambitious, who have aspirations to be best in their market, to go international. If those chime with you then you may be an Inflexion person.”

Path to exit

However strong the relationship between a founder and their private equity backer becomes, the relationship is entered into on the basis that it won’t be forever. Inflexion’s investments are typically based on a horizon of five to ten years, after which time the business is hopefully ready for the next step on its journey, be it a further round of investment, a merger or acquisition, or an IPO.

“Floating the company is something we always consider for Inflexion businesses,” Tim says. “It’s not for everybody, but a floatable business is certainly an attribute that we look for, because it gives an extra string to our exit bow. We support businesses in terms of getting the right advice and structures around them for that particular exit route. But we couldn't ever want to force a management group to go to IPO. We look to follow whatever the optimum exit path is for any of our businesses. The key thing is building a relationship and having a shared vision and a shared strategy.”

Risk Warning
Investing in private businesses involves risk, including illiquidity (the inability to sell assets quickly or without substantial loss in value), lack of dividends, loss of investment and dilution.
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