In the first of our private equity regional spotlight series, we hear from Daniel Bond, Corporate Finance Director at BDO LLP, and Oliver Schofield, Investment Director at LDC, about key trends within the South West and how management teams can make themselves attractive for investment.
Daniel Bond, Corporate Finance Director, BDO and Oliver Schofield, Investment Director, LDC
What’s the funding landscape like in the South West?
There is no doubt that the South West is an emerging hub of innovation packed with world-class talent and an attractive region for PE/VC investment. In the last year almost 350 businesses across the region received a form of equity funding, 82 of which raised a minimum of £1m. Our recent ‘Rethinking the Economy’ survey sent to 500 mid-market business leaders, shows that all South West based respondents have funding as a key priority, almost a quarter of which expressed a desire for PE/VC as their preferred source. PE/VC firms will play a crucial part in supporting the regional economy return to and exceed a pre-pandemic state - they are the most active type of investor in the city of Bristol, being responsible for 35% of announced equity fundraisings by high-growth companies in the city – more than double the UK average of 15%.
What appetite is there for investors in the region? Has the pandemic created greater opportunity for private equity?
Entrepreneurs and business leaders are driven by a fundamental need to grow, even if that means taking new and unplanned routes to continue their journey.
Oliver Schofield, Investment Director at LDC comments: “One key trend we’ve seen during the last 18 months is an acceleration of buy-and-build activity. While the start of the pandemic put a temporary pause on many firms’ growth plans, what followed was an increase in management teams wanting to build scale and resilience by making acquisitions. In 2021, LDC supported 65 bolt-on acquisitions within our portfolio, and provided follow-on funding where it was required to support this activity. Looking ahead, we expect this level of activity to continue as two-thirds of our current portfolio businesses are on an acquisitive growth strategy.”
Management teams across every sector had to adapt quickly to a new operating environment, and while this brought inevitable challenge, it also created huge opportunities for a number of sectors, including TMT. Oliver further comments on recent LDC activity: “LDC has a strong track record of backing management teams in the South West. Last year, our South West and Wales team completed transactions with a combined enterprise value of nearly £300m.” Deals included:
- Investment in Bristol-headquartered digital media company Hybrid, which supports a global client base across the education and tech industries;
- Investment in Sohonet, a leading international provider of connectivity and software for the media and entertainment industry;
- Exiting Gloucester-headquartered ADEY in February, after backing the water treatment specialist in 2016 to support its domestic and international expansion; and
- Supporting HSL Compliance, an SGI company, to acquire Llanelli-based Albany Oak, an established water and effluent treatment specialist.
What can management teams be doing to help seek investment?
Having a strong and supportable growth proposition is key to attracting investment. While the growth proposition itself is inherently dependent on commercial factors and the ability of the management team to execute its plans, the strength of the proposition can be evidenced in several ways.
Daniel Bond comments: “Evidencing the key drivers of revenue growth/sustainability, profit and cash conversion is paramount to supporting future growth aspirations when making your case with potential investors. It is also important to prepare a granular projections model (P&L, balance sheet and cash flow) in which the assumptions are clearly detailed, to allow an investor to build an informed view as to their achievability. ESG factors are also high on the agenda. Investors are increasingly interested in non-financial factors in forming views on risk areas and opportunities for growth. Getting a good understanding of investors’ ESG criteria, and seeing how you might address them, will be key to attracting investment. Finally, if possible, maintain an analysis of your sales pipeline and its historical conversion rate to sales. This will help to support and add credence to your sales projections.”
Oliver adds: “There are numerous important questions to be answered when trying to articulate the value of your business. It is crucial that business owners consider the following three areas when seeking investment:
- Make sure your books are in order and maintain good historical financial data. Potential investors are looking to identify growth opportunities, so it is key to be able to evidence your success to date, and outline a clear, achievable plan. Future opportunity is often more important than current scale. If the numbers are heading in the right direction, that shows a potential partner there is an opportunity for them to support.
- Focus on people. A private equity partnership is all about building strong relationships and working closely with those running a business to help make their ambitions a reality. Having a strong team gives a private equity firm the confidence to invest. Investors will also value plans to retain and nurture existing talent in the business, and opportunities to bring in new skillsets – showing that you’re focused on safeguarding the business’ future prosperity.
- Consider the risks. Don’t construct your business plan wearing rose-tinted glasses, as factoring in any potential bumps in the road shows you’ve thought carefully about how your business will adapt to potential challenges over the next few years. Support from a private equity partner can help you to absorb some of the potential shocks along the way and continue to accelerate growth in your business.
At LDC, we have committed to invest in at least 100 UK mid-market companies over the next five years, and the South West is a key growth region for us. Nationally, we invested £400m to back 19 new management teams last year, and we are excited to continue to meet and back the best entrepreneurs in our region.”
To summarise, investment in the South West remains robust with high levels of activity; for the right opportunities, investors are still in a position to deploy significant funding in the region. If you foresee that you will be looking for equity investment in the future, then you should consider having conversations with advisers and potential investors at an early stage. From those conversations, you will be able to gauge investor appetite and start to form views as to which investors and/or types of investors would be a good fit for your business (and vice versa). Getting facetime with potential investors will provide you with an opportunity to demonstrate a strong/credible management team and hence strengthen their interest in your business.
If you are considering short-medium term investment options, including funding requirements, and need to build your knowledge of Private Equity, please read our Demystify brochure.
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