Dispelling the myths of private equity

By Michael Sonego - October 18, 2018

Private equity firms account for a significant proportion of business transactions in Australia, seeking opportunities of all shapes and sizes, including middle-market businesses.

In fact, private equity (PE) deals account for around 16% of all mergers and acquisitions in Australia, with an estimated $8 billion in funds currently looking to be deployed. But, while private equity firms have considerable funds to invest and an appetite for new ventures, it’s not uncommon for business owners and executives to demonstrate hesitance. Inexperience, uncertainty, and widespread myths about the challenges of working with PE hinder partnerships between business and PE firms.

At the recent Derwent/Pitcher Partners breakfast briefing, the Chief Executive Officers (CEO) and Chief Financial Officers (CFO) of Retail Zoo and Asaleo Care Ltd dispelled some of the common myths of PE. Having managed successful PE investments, they were able to share their experiences of transitioning to PE backing and exiting via an initial public offering (IPO) and trade sale.

After the Riverside Company acquired a majority stake in Retail Zoo (owners of Boost Juice and Salsa’s) in 2010, Scott Meneilly (CEO) and Andrew Wilson (CFO) led the business to double its earnings, acquire Cibo Espresso, expand to 400 stores across 15 countries, and sell to Bain Capital for a significant increase in enterprise value.

Overseen by Peter Diplaris (CEO) and Paul Townsend (CFO), SCA Hygiene (whose brands include Sorbent, Handee, Purex and Libra) was renamed Asaleo Care Ltd and listed on the ASX in 2014 with a market capitalisation of $1 billion, and an EBITDA increase from $86m to $140m in two years. This followed Pacific Equity Partners (PEP) acquiring a 50% stake in 2012. Since listing, the company has returned over $300 million to shareholders.

Five common myths about private equity

Below are five common myths about private equity, and tips about how it can be leveraged to grow your business to new highs.

Myth 1: PE are all about saving money, so don’t pay top wages

PE often recruits for future state roles, with implications for both the cost and efficiency of human capital! The essential role worth investing in immediately is the CFO. SCA Hygiene (SCA) hired Paul Townsend because of his reputation as a strong CFO who could negotiate between big personalities, while drawing on his soft selling skills to get things done.

Myth 2: PE will suck the energy out of entrepreneur-owners

There can be concerns amongst young businesses that PE stifles innovation and ideas. Retail Zoo was initially concerned that PE would mean a loss of DNA and what it stood for. PE firms are not operators but owners – driven by results, data, targets and KPIs. However, Retail Zoo found with PE on board, it “sharpened the organic culture, but did not ruin it”. Founders have strong opinions and ideas, but PE have seen dozens of brands grow and develop, and can bring fresh thinking to push you beyond your boundaries.

Myth 3: PE will dictate what you have to do

Good PE invest in learning the business, so that when the time comes to make decisions and implement changes, it is done from a place of genuine understanding. The Riverside Company spent a couple of years learning about Retail Zoo. PEP invested a lot of time in understanding SCA, and even brought in associates to share their reflections and deepen its understanding of the business. Talk to your PE backers as much as possible so they have a robust understanding of your ethos, people and processes. It is also essential to clarify roles for founders, executives and PE early on.

Myth 4: The winners from PE deals are PE

PE aren’t just in it for themselves: it’s about maximising returns for all on the journey including the other shareholder (original owners) and the executive team. At Retail Zoo, the options program was extended beyond a select few to the executive team as well as new talent. This ensured the entire team was heavily invested in the success of the company’s ultimate sale. 

Myth 5: It’s all about the end game – the sale or IPO listing

While the goal of PE is to work towards the end game, the business will still function once PE has achieved its internal rate of return (IRR) and exited. Executives who stay on must keep this in mind and build a business that has longevity beyond PE exit.

Is my business right for PE? Pitcher Partners specialises in providing accounting, tax and advisory services to middle-market businesses, while Derwent is a leader in executive search for this same market. Please get in touch.

 


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