PE or strategic investor: what’s best for your business?

With economic growth across Asia-Pacific continuing to outpace other regions, CEOs and business owners of mid-market companies are increasingly on the radar of private equity (PE) firms and strategic acquirers. When deciding to sell or raise capital, how do CEOs decide which type of investor best fits their business needs and objectives?

    We explored this question in the first of our 2017 CEO Series Breakfast Briefings, held in Singapore on the 5th of April 2017. Bringing together industry experts from DSM Sinochem Pharma, EY and Clifford Chance, the event featured a keynote presentation and panel session and generated a series of key learnings and insights from the discussions.

    Keep it Simple

    A transaction can be a draining process for the CEO. Negotiations can take more time and be harder than expected creating frustrations along the way. With negotiation tactics coming into play, there is a risk of getting away from the primary objective. CEOs need to know what they want to achieve from the investor or the exit. Most often negotiations boil down to just a few critical points. Be candid in stating what you want and be sure the other party is doing the same as well.

    Align your objectives with your shareholders

    If the company has multiple owners, it is essential to reconcile any differences and confirm common objectives. It is important to explore how these objectives compare with the financial or ownership goals of prospective investors. Aligning your strategy and your short-and long-term goals, with those of potential investors is key to generating maximum value.
    -Strategic buyers are focused on enhancing their business through investment or acquisition. The synergised dimension will most often be prevalent in the rationale for the deal, leaving the entrepreneur with less autonomy on the strategic direction.
    -Financial buyers, such as PE firms, will look at your company as a standalone investment with the potential to deliver organic growth, or as a platform for a buy-and-build growth strategy that generates value through bolt-on acquisitions. They may have experience in your industry, but they do not hold competing investments.

    Don't get side-lined by the negotiation tactics

    Once you have connected with a potential investor, you need to find out what its motivations are and whether there is any scope for alignment with your objectives. Perform due diligence on the investor early in the process. Review a PE firm’s investment criteria and understand a strategic investor’s vision and strategy. More importantly, talk to the companies involved in the previous transactions to find out how the relationships went.
    Anytime you bring in an investor, be prepared to give up some level of control. A PE investor may leave the founder or CEO in place to manage the business, but it may impose certain other information or veto rights. It is likely to have an exit strategy that will see it sell or IPO the business shortly, which would prioritise short-term gains over longer-term strategy.
    A strategic investor, on the other hand, may bring in more governance requirements but may also provide more growth opportunities through consolidation and innovation. It is likely to want to hold onto the new business indefinitely, integrating it into its operations. This may mean more disruption for staff and management.

    Don't leave money on the table

    As a business owner, you should take all steps to improve operations before bringing in investors or planning an exit. You may need to eliminate excess costs, boost your sales organisation, tighten your supply chain, and implement stricter working capital management. To do this well, you need to take stock at an early stage so you can make any necessary changes.

    Engage experts for support

    A PE or strategic investment transaction is often complicated and may involve numerous challenges. The skills required to steer a firm through this complexity are very different to those needed to launch and manage a business. CEOs who recognise this, are more willing to engage expert support and therefore are better prepared when opportunities present themselves.
    Decide early on what type of advisors you want to engage with and when you will need them. It can be time-consuming and costly when identifying suitable investors. Partners like Finquest help CEOs build their deal team by connecting them to potential investors and new opportunities in an efficient and confidential manner.
    Overall, at every stage of the process – when you are looking for an investor, engaging in early negotiations or closing a deal – be sure to keep your objectives firmly in mind.
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