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Venture capital is more than just cash, it can be a route to growth

8th Nov 12 7:36 am

Valerie Kendall, a partner at WestBridge Capital, looks at why business owners should consider private equity as a route to growth

There is a widely held view that management teams only involve a private equity house when they’re grooming a business for exit.

Of course, there are times when this is the case but this misconception discounts the numerous other advantages of private funding.

The private equity option should be in the toolbox of any ambitious management team with an appetite for growth.

Many uses

Introducing private equity means you gain much more than a new supply of capital – you get new colleagues and a bank of experience to draw on.

The trick is to be selective in your choice of partners.  Consider the candidates as if you were appointing new board directors.  Ask yourself:

  • Can I work with these people?
  • Is there natural chemistry between us?
  • Do they have the experience we need?

Taking private equity partners into your boardroom should not be seen as a daunting experience.  You are gaining colleagues, not adversaries. Just make sure you all share the same goals – I’ve heard of company directors’ hell bent on using their new capital to diversify by acquiring new businesses while their new private equity partners are equally intent on consolidation and disposal of interests – not a good start.

Being an owner/manager or managing director can be lonely. Even with a great management team, you are expected to keep a firm hand on the tiller and all the plates spinning. You may need to distance yourself, once in a while, to find time to think about broader issues like strategic growth.

Carefully chosen private equity advisers will help spread the load, perhaps by introducing new systems or ways of working.  Unlike a bank, a private equity partner will offer advice, judgement and momentum, as opposed to mere liquidity.

Perhaps you’ve always wanted to become more competitive, enter new markets, introduce new products or invest in new facilities, equipment or staff.  Private equity teams bring a wealth of experience of the benefits and pitfalls of such changes.  Maybe you need an introduction to secure a new contract; perhaps you’re thinking of buying-out a competitor. 

What’s uncharted territory to you is probably familiar ground for them. 

By way of illustration, one of our investee companies had started to slightly underperform against its plan and narrowly failed to meet one of its banking covenants. 

We undertook a review and found a disconnection between the marketing and sales function. Put simply, the marketing effort was being directed at the wrong type of target customers, resulting in poor quality leads.  To correct this:

  • The sales and marketing functions were combined under one team leader;
  • Closer sales team mentoring was put in place; and
  • The MD was given support to tackle the problem  and bring about the changes

Within three months, the business was back on track and meeting its covenants. Early intervention and rapid, incisive changes prevented a problem escalating into a crisis.

These sorts of hiccups are more likely to arise in smaller, more entrepreneurial ventures that private equity houses like ours support. 

Most owner-managers love being in the driving seat but often have less enthusiasm for the ‘serious’ side of running a business, seeing compliance, reporting and financial housekeeping as time-consuming and tedious.

Private equity investors introduce stricter governance and rigour which in turn creates confidence.

Other sources

I am an unabashed and vocal champion of private equity. It is a robust and sound alternative to other sources of finance. Whereas banks and financiers will remain passive, an angel investor may become overbearing or even dictatorial.  Private equity partners have a vested interest in helping your business grow and become more valuable and profitable.

Banks, despite what their publicity may say, are still not lending.  Even when they do, they are rarely ideal business bedfellows. Their teams are made-up of managers, not entrepreneurs and risk-takers. Banks are interested in getting their money back, not the growth of your business. 

My partners and I did our homework before setting up WestBridge Capital. We knew there was a shortage of funding for businesses needing investments of between £1 and £5 million. 

Since raising our £30 million SME Fund, we’ve supported a number of successful, ambitious businesses. Among them are Aero Stanrew, which designs and manufactures specialist electronic components for the global aerospace industry and e2train, which provides employee performance management and e-learning systems to organisations including the NHS, The Home Office and O2.

We have helped each achieve specific objectives by bringing fresh eyes and applying old-fashioned business sense.

I’ll leave you with a quote from Clive Scott, managing director at Aero Stanrew.

“We had many private equity houses courting us but chose WestBridge Capital for a number of reasons. They ‘got’ our business. Even before we selected them, we were impressed by the ideas they put forward and the extent of their contacts and experience meant that they could add real value to the deal.  Yes, their capital has been welcome but having support, advice, wisdom and experience on tap has been of far more importance and value to us.”

WestBridge Capital is a private equity house with £30 million to invest in established, profitable and ambitious SMEs – www.westbridgecapital.co.uk  

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