Private equity funds try to pick winners

Private equity funds are cashed up and looking to invest in private companies. How can you make your business a fore-runner in the race?

Private equity funds are cashed up and looking to invest in private companies. With an increasing number of funds bulging with investment dollars, fund managers are on the lookout for investments that fit their profile. It all sounds like great news for Australia’s private business owners who are looking to sell, but getting the investment dollars is trickier than it seems and, frankly, more difficult than it need be.

The backdrop to this is the constant flow of superannuation funds into the financial system and an increasing nervousness among fund managers regarding the possibility of a major price correction on the Australian stock market. This has prompted large funds to look for alternate investments, and so a number of smaller private equity funds have been created which, in turn, are looking for investment opportunities in private companies.

The difficulty for privately-owned businesses is that the funds all have different investment criteria. To make matters more complicated, individual funds often readjust their criteria after each investment they make. This means that your business may be just what they are looking for – until they find one just like it. Alternatively, you might be just right for them as a second or third investment, but they are still looking for the first.

A further difficulty for business owners seeking investment is that most of the funds are not easily found and do not encourage calls. So if you are looking for investment, you need to advertise and see who calls. In dealing with these enquiries it is worth asking what their investment criteria is upfront, as this can save both parties a considerable amount of time.

On the other side of the transaction, the fund managers are anxious to ensure that they pick some early winners and are setting themselves some very conservative criteria to try and achieve this end. This fear of failure has many of them sitting on their hands. This is making them more anxious, as it is hard to justify management fees for having money sitting in the bank.

The fund managers’ favourite is a well-established business with a turnover in excess of $10 million and offering a price earnings ratio of less than six. Outside this conservative envelope there are still fund managers willing to take a punt, but you will need to convince them that your business is a winner.

To read more Andrew Kent blogs, click here.