Insights

What are the ingredients of a successful private equity backed M&E business?

Name: MHA
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Posted on: May 19th 2022 · read

Over the past few years, the private equity industry has had a number of unreasonable accusations levelled at it; accusations that have often ignored the fact that private equity practitioners do know what they are doing, and they do try to support the manufacturing & engineering (M&E) businesses in which they invest, utilising their many years of experience and expertise.

Laurence Whitehead, Partner in our Corporate Finance team, comments:

“Private equity investment into the M&E sectors is currently, and will remain in the future, one of the most important aspects of the UK’s financial services industry. In very broad terms, without an active private equity and corporate finance community, some M&E businesses would not thrive and prosper. History tends to support this argument and, contrary to popular belief, even successful M&E businesses cannot be built on bank lending alone, even in the good times.” 

Currently UK and global investors are committing new money to private equity as low interest rates prompt them to seek higher-yielding alternatives.

The ingredients of a good private equity transaction in the M&E sector must always include a close working relationship with a knowledgeable management team, whose strategy is clearly outlined in a dynamic and challenging business plan. This is a fundamental platform upon which growth can be delivered and a M&E business can be positioned for the next stage of its development.

Good private equity also involves several key business disciplines without which the business opportunity and subsequent investment opportunity can be lost. From the time of investment, there are numerous ways in which a private equity investor should look to add value to an M&E business and accelerate the growth strategy.  Successful investment can be tough to achieve on a long-term and consistent basis, but there are numerous success stories out there where M&E companies have achieved very profitable growth with private equity backing.

Such deals demonstrate the advantages of thoughtful private equity investment for UK M&E businesses.  Prior to the investment, proposed transactions need to consider post investment activity, the development of strategic plans and the identification of next stage development.  If the private equity investor and the management team can achieve these key goals, then success has a high chance of being achieved.

Laurence adds:

“Structured correctly from the outset, good old fashioned private equity really does work for M&E businesses.  Private equity can be successful from both a business growth and a wealth creation perspective.  The core of this approach revolves around the relationship between a knowledgeable private equity partner and a high-quality management team.”

Exit timing is often misunderstood in the context of private equity.  A good private equity investor works with the management team in order to judge when it is the right time to realise the investment. This is when strong relationships are essential and there is a need for a clear understanding between all parties about the dynamics of the M&E business.  What remains common is the essential requirement to position the business correctly for a potential buyer.

The success or failure of a private equity investment invariably rests with the people responsible for that business: the management team and other key stakeholders.  Private equity houses must have a good understanding of the specific business dynamics if an M&E business is to succeed. 

Laurence concludes: “It is imperative that both the management team and private equity house understand the market in which the M&E business operates and also what drives each party to succeed.  Well thought out and collaborative private equity is fundamental in the M&E sectors in order to produce the right results for all parties.”