Navigating a private equity investment

For private companies seeking to grow their business, the dilemma of choice can make the first step of identifying potential investors complex. It’s essential that your advisors work closely with you to understand your aspirations and to help navigate you to the right private equity vehicle.

Below, we illustrate the universe of available private equity (PE) investors in Canada.

Venture capital

• Seed or early stage, often specializing in certain industry sectors such as technology or healthcare.
• A minority investor, backing a management team and the development of valued intellectual property.

Family office

• Investment office of one or more high-net-worth individual(s) and their family. Focus is on diversification and reinvestment of wealth into a range of asset classes, which frequently includes private equity investments.
• It acts as both an active and passive investor via majority and minority stakes in multiple businesses that are typically held for a longer period than other institutional investors. Often focused on investment in sectors and businesses familiar to the underlying family.

Traditional buyout firms

• Active core of PE funds seeking transactions with a broad range of enterprise values in Canada.
• They focus on deploying target levels of investment capital per deal in attractive businesses and will require control.

Search funds

• A subset of the mid-market, these investors are focused on the acquisition of a single business into which they will step in and operate as a majority investor.
• Facilitate a transaction where an owner is looking to ensure success of management.

Distressed focused funds

• Seeking to transform suboptimal or underperforming businesses, which will typically be acquired at lower valuations.
• They use operating partners to deliver transformational change, often including enhancement of management teams.

Producing a compelling business plan to immediately grab and retain the attention of a potential investor is a critical element of a successful PE deal.

Here are key questions that you should consider:

• Confirm the size of the market for your products and services (known as the total addressable market).

• Describe the competitive advantage of your products and services and how you will maintain it in the future.

• The background of the team should show they have the relevant experience to grow the business. Where gaps in the team exist, describe and how you intend to fill them.

• Point to a track record of employing talented staff that have stayed with the business for a considerable time and what incentives have kept them from leaving.

• Being able to present a strong and diverse set of customers is a key differentiator for a business. Ideally a mix of deep long-term recurring relationships along with some newly acquired customers demonstrates both sustainability and the opportunity for growth within a business model.

• Break down your revenue between the following categories: contracted, repeat, and one-off customers. Other categories might be relevant depending on the type of industry you operate in. The more contracted and repeatable revenue you have, the more interested an investor will be.

• The assumptions driving your forecasts must be realistic and backed up with historic data. These forecasts must make sense in terms of the growth rate of the overall market and your competitors.

• Prove this with high-quality financial information such as profit and loss statements, cash flow forecasts, and the balance sheet. It’s important that any business plan is clear, balanced, and well thought through. It’s the story that supports your forecast numbers.