Jon [00:00:03] Hello and welcome to The Loop, where we untangle today's business issues by throwing real life scenarios at a panel of experts and asked them to deliver practical advice on how to tackle current business issues. In this episode, we're discussing private equity. Now businesses across the UK have been through a difficult time of late and some have been considering their future and what decisions they can make now that will set them up for success. For some, that decision could be a private equity investment. But private equity has had some bad press lately, so why should you consider a private equity investment? Well, here to help us answer that question, we have Charlie Jolly, Head of Private Equity at RSM UK, Kirsty McDonald, Partner at Growth Capital Partners, and Hamish Floyd, the Chief Financial Officer at Cloudsense. Thank you all for joining and welcome to The Loop.
All other speakers [00:00:57] Thank you. Thank you.
Jon [00:00:57] Well, it's great to have you here. Before we jump into the discussion, it'd be good to know a little bit more about each of you and perhaps a short introduction to your roles and your relationship with private equity. Charlie, I'm going to come to you first. It's great to have you back on the programme again. Talk to me a little bit about your role.
Charlie [00:01:14] So at RSM, we provide a wide range of services to private equity firms and also to the companies that they invest in. Helping the companies execute usually what's quite an ambitious business plan, and my role in particular involves spending a lot of time with private equity firms, understanding the sorts of investments they're looking to make, the sorts of companies they're looking to back, the types of management teams and the sectors that they've worked in before. So really trying to understand the market and make sure that we are introducing our clients to the right sorts of private equity firms that can help them maximise their opportunities.
Jon [00:01:54] Thanks, Charlie. And Kirsty, welcome to the Loop. Great to just hear a little bit more from you.
Kirsty [00:01:58] Yeah, thanks, Jon. And thank you very much for inviting me to take part today. I guess if I start with a short personal introduction, as Jon said, I'm Kirsty McDonald, Partner at Growth Capital Partners, or GCP. Part of my background will be obvious already from my accent. I come from the West Coast of Scotland. Part of my background will be less obvious is that I'm also an engineer by training. But I went quickly into the business world on graduating. I was part of the founding team of a strategy consulting firm and then I moved on to that investing side about 17 years ago. I worked for corporate for a couple of years, five years in a large private equity firm, and I've been at GCP for 10 years now. The last eight of those as a Partner.
Jon [00:02:42] Well, it's great to have you on the programme, Kirsty, and you're I guess you're a voice of private equity on the show.
Kirsty [00:02:48] Yeah, I'm slightly terrified as being described as one of the panel of experts, but I can certainly provide a private equity perspective to the discussion.
Jon [00:02:54] Well, thank you. We're looking forward to hearing your expertise as as well. Hamish, I'll come to you as well now, be good to find out more about your role and about about the business as well.
Hamish [00:03:04] I'm CFO at Cloudsense, so Chief Financial Officer so obviously I head up the finance part of the business, but also HR and legal.
Jon [00:03:13] Got your hands full there then they would say.
Hamish [00:03:14] Yeah absolutely, yeah, yeah. My my role is is obviously the operational side of that, but also really one of the key parts of the investor relations. So I provide a lens for the private equity firm in terms of through through the lens of numbers. Clearly they're very numerate in number driven, rightly so. And I provide that information on a very regular basis to to to them. And it helps obviously, the uh this is a data driven conversation between the CFO, the CEO and also the investors. So that's that's my primary role.
Jon [00:03:53] And if I understand rightly as well Hamish, Cloudsense is itself a PE backed company is that correct?
Hamish [00:03:59] That's right. Absolutely. Yes. Our current investors purchased from founders back in 2017.
Jon [00:04:06] Okay. Charlie, just taking a step back for a second. Talk us through in layman's terms, what you see private equity essentially as being.
Charlie [00:04:16] So private equity firms invest in minority or majority stakes in private companies and with the view to help provide the capital so that that business can grow over a period of usually three to five years. And at the end of that period, they and the and the management team sell their stake either to another private equity firm, to a trade buyer or in a float, so either to the public market/ And the role of the private equity firm is to provide a return over that period to their investors, which tend to be pension funds or insurance companies. That is better than the return the investors could have got if they invested in the public markets. So their job is to outperform public markets and they do that by investing in small private companies and helping them grow.
Jon [00:05:04] Well, it's great to have all three of you in the studio for this edition of The Loop. We're here essentially to help middle market businesses untangle some of today's biggest business issues. And we do this via The Loop challenge. I'm going to talk you through two real life business scenarios, and we'd like you each to consider what practical advice you would give that business in a situation, of course, that focuses on that relationship with private equity investment. So that's The Loop challenge. Before we jump in, though, do you accept the challenge?
All other speakers [00:05:37] Yes, absolutely. I accept.
Jon [00:05:40] Well I'm very pleased because as we've said before, if you don't, we don't have a programme. Let's let's jump into that first scenario and start thinking about about the story that we've got here. So imagine you're the stakeholder in a private equity backed business and the business is executing an ambitious growth plan. The past five years have seen steady progress, and it's been a successful overall relationship that you've had with your PE backer. But then crisis hits in March 2020 in the form of the global pandemic and your growth plan or frankly, goes out of the window. Your top priority is to stabilise and reset the business and make it resilient for the future. So, Hamish, I'm going to come to you first. What would you be thinking about in this situation in your position?
Hamish [00:06:26] Cash. That was the first thing that we were we were concerned about. Now, it was broadly business as usual, actually, in terms of our, we run lean, you know, we operate a very tight cash process. But we went even tighter having daily meetings around where our cash collections, et cetera. Our our fear was that people would just simply stop paying. Now we were lucky and that our customers are resilient. And and, you know, we have renewals collected annually each year. So so that's certainly made it a lot easier. And so the sectors that we serve were were OK, but we did a lot of stress testing, a lot of 'what if?' planning, and we scared ourselves silly and and looked at various outcomes and you had sort of, you know, about four different outcomes of where we might end up in terms of the investor relationship. They were great. They were, they all recognise that this was unparallelled territory. And so they were very supportive and and they gave us some good advice as well. And I think I think also that if we had been owner-run and we would, we would have felt more exposed. You know, you've got some some guys who are in the private equity business who are well versed in raising capital when it's needed. So we felt they got our back.
Jon [00:07:57] Yeah. So cash is king definitely there. And the communication as well. Kirsty, what about your thoughts on that, your perspective, perhaps more from the, the certainly from the PE side.
Kirsty [00:08:07] Yeah. In terms of how we came to deal with the COVID crisis, the approach was very much in line with our approach at any other time in that investment relationship, it is that one of partnership. And what does that mean for us, it means about being, I think, thoughtful and flexible. It means being balanced and pragmatic, so particularly when you're faced with some of those er terrifying scenarios that Hamish had mentioned. And it's about having trust, it's about being focussed on the people, their culture, and putting that at the heart of our behaviour. And I think the other thing was the culture within our own firm was very consistent throughout. So what the management teams were having to deal with them from GCP was the same that had always been so, you know, we invested a very small number of businesses. The deals really matter. We all invest personally in every business. So from an intellectual, financial, professional, personal perspective, you know, we want the absolute best for these businesses so I hope what they got from from GCP was, you know, a team that were hardworking, committed, absolutely engaged, but but senior and experienced at the same time so that we didn't get distracted or interfere needlessly.
Jon [00:09:16] And Charlie, you must have, I dare say, witnessed a scenario very like this in real life for your role at RSM. What are your thoughts?
Charlie [00:09:26] Yes, we felt that it was that the COVID crisis was the acid test for the board investor and and management team relationship. So we actually ran a survey of private equity backed businesses and we surveyed about 70 and asked them a number of questions about how- how the pandemic had affected and- and how the PE firm had supported or not in the intervening period. And we got some very heartening and- and broadly very positive feedback. The vast majority of companies that we surveyed had been negatively impacted, 100 percent had been disrupted enormously. But that same majority were also very positive on the support they'd received from their private equity firm. And that majority also felt that having a PE backer had made them more resilient over that period. So it was really it was really heartening, particularly at a time when a lot of people were very worried, quite rightly, about the prospects for their businesses.
Jon [00:10:28] So just picking up on that a little bit more Kirsty, where do you think private equity can really make a difference in this situation?
Kirsty [00:10:36] Yeah, and Jon, if I can give you a bit of context first, actually, because, you know, one of the great privileges of our role, our job, if you can call it that, is that we work with outstanding businesses and really remarkable people who have already been extremely successful, quite frankly, without any help from us. So, you know, I hope our team has the humility to to respect that and understand that. So we make a very conscious decision not to get involved in an operational day to day executive role so that there is definitely a line there. So where can we help? I think it's in two areas. One is about focus and priorities. You know, we have experience of being on that value creation journey with private equity time and time and time again. So getting straight on, where are we all trying to get to together? What are the focus areas and therefore what are the priorities and the short, medium and long term? And I think that was extremely important through COVID as well to keep our eye on that. And then the second thing is, you know, we do have complementary experience and a network which can help. So whether that's, again to Hamish's point around forecasting and planning, whether it's about keeping an eye on financing options, some of the COVID support schemes supplied by the government. We have a network in our own portfolio, the businesses that were invested in who are facing the same challenges all the time, I think everybody was negotiating with HMRC on the same day at one point and being able to talk to each other was massively powerful at that stage.
Jon [00:12:03] This is interesting because as there's a scale here, isn't there? If you're a private equity investor, you've got investments in a number of businesses potentially and I guess you're seeing how each of those are faring and their individual experiences as a I guess, a collective knowledge that you can draw from that. Is that something that is particularly useful in this situation, do you think?
Kirsty [00:12:21] Yeah, absolutely and, you know, we made an effort to connect, that is actually usually the CFO and a number of different areas, to make sure they were all talking together, that we were recognising the areas of of commonality, because even though it's quite different sectors that we invest and often there are common challenges, particularly through a point like point like COVID so yeah.
Jon [00:12:40] Now that's very interesting. And Hamish, from- from your perspective, back to the the CFO, where did you feel, in addition to the cash point that you raise, where did you feel the most benefit in terms of that relationship with the private equity backer?
Hamish [00:12:58] Well, actually, what Kirsty said resonates because like her firm, our private equity backers also brought all the CFO portfolios, portfolio CFOs together and went through a sort of bit of a checklist of all of the areas we should hit in terms of talking to the local tax jurisdictions. And from my perspective, you know, we don't have a big footprint in the US in terms of advice and so we leverage that and that was very helpful, we got some some good benefit back from that.
Jon [00:13:30] And that's a consistent theme I'm hearing, I think, from all of you the importance of communication lines, of communication within the business and between that business and the private equity backer as well. From your perspective at RSM, Charlie, do you see that as essential that if the communication breaks down, well, of course, there may be other difficulties that will come from that?
Charlie [00:13:51] Yes, certainly. And I think it's it works best where where open communication is established up front and quite often through even even through the deal process. And it's not necessarily around the actual information itself, which is really important because PE firms are not generally operational owners. So the only the only way they can learn about the businesses is through being provided information by the company, so there is a there's a big information requirement on a company when it's PE backed anyway, but certainly around the willingness to share as much information as possible. And the willingness and keenness to build a really comprehensive view of the of the business, how it's trading for a third party and where there is that willingness it works very well and both teams work to make sure that information flows. And where it does flow, they can the business is done in a much better place to make bold decisions. And as a result, it normally does a lot better. So it's more about the willingness and the approach and the attitude, really.
Kirsty [00:14:59] I also want to just add to something that Charlie was saying about bold decisions through the pandemic, because, you know, obviously their priorities in the early days were about well-being of our staff. It was about cash and profits. It was then about looking after stakeholders. But we've also seen a number of the businesses that we work with take those bold decisions, particularly around technology, around ESG issues, to really build back significantly better. On average, our portfolio is already about 20 percent ahead on revenue than it was pre-pandemic, about 33 percent ahead in profitability, gearing is down so the performance metrics prove that, you know, they're really in great shape, having hopefully come through it now.
Jon [00:15:42] Just to to summarise then, perhaps on some of the thoughts that you've raised on this scenario, it strikes me that, as we said before, communication is essential here and a strong degree of trust and maybe a degree of pragmatism as well between all sides. The support that your PE backer can provide, especially in a strange situation like the one we've just been through in our scenario here, really can be very beneficial. Is that would be a fair way of describing the summarising, perhaps what we've just been discussing now.
Charlie [00:16:13] Yes. Yeah, absolutely.
Jon [00:16:15] Well, we're going to jump onto our second scenario, so thank you for helping with our first. So we'll move on to to our second Loop challenge. Now, imagine you're the major shareholder of your family business and you've experienced very positive growth, very positive success. Over the past few years, you've been considering your own future and the possibility of selling the business. Private equity firms get in touch with you a lot to discuss PE deals, but you've never really considered them seriously, well, not until now. So, Charlie, I want to come to you first here. What would you advise in this situation? What would your take be if you were talking to the particular shareholder that we're thinking of here?
Charlie [00:17:02] Certainly, I think a business owner of a middle market business in the UK, if they're looking to sell their business, they should consider private equity. I ought to sort of confess a bias there as RSM UK's Head of Private Equity, that's pretty obvious.
Jon [00:17:18] You're talking about it very well.
Charlie [00:17:19] Exactly. But but I think there if there are some reasons why and why private equity should be becoming more attractive to people in that position. One is that the private equity market has been very successful over a long period of time and they've raised a lot of capital at the moment that has enabled them to compete with trade buyers, which is in most situations the other option. And so you should consider it because you might get the same price and if price is a very important thing to a selling shareholder, then they can, more often than not competitive at that level. The other is that with the growth of the private equity market, there have been firms who have specialised at various different areas and today there is there is almost a private equity fund for every situation, whether that's turnaround, whether it's high growth, whether it's scaling across Europe, growing into the States. There are firms that specialise in these various things and including firms that will cope with a high degree of management change. So if you're selling your business because you want to leave and you want to stop and you want to retire again, that's not a reason not to speak to private equity too.
Jon [00:18:37] And Kirsty, as a private equity voice in the room here, what would you say are the motivations for the PE firm?
Kirsty [00:18:46] I guess from a personal perspective, you know, we're looking for the situations, the partnerships, the businesses that we get involved in to continue being such a great success. You know, personally, I would love to look back and and see that continue through my career. It would also be naïve not to acknowledge that we are judged on our financial metrics, though. And the fund performance is is absolutely central to to our motivations and to, you know, to our continued success. But I guess we believe that you can still generate top returns with, you know, a long term, fair and holistic approach, because it's those kind of partnership characteristics that mean we can be invited into these amazing businesses in the first place.
Jon [00:19:25] And I'm going to put it to you Kirsty, why do you think PE firms get a bit of a bad press? Is it because the media just doesn't really understand them, or is it because of actions that have been taken by a few businesses? But it does seem to be that element that some people have. Not all. Why do you think that might be or is it a misconception?
Kirsty [00:19:43] Oh, listen, I think in the early days of private equity, long before my time, I hasten to add there, you know, the reputation of tax avoiding, asset stripping, pinstriped suit wearing kind of long lunch taking private equity executives was sort of sexy and appealing in the media and so that has got picked up but I think the reality of it now, the market has matured, it's become very sophisticated and like Charlie, I mean, I would have to say this is the private equity representative in the room, I think it's a really, really great option for it for business owners going forward.
Jon [00:20:13] And Hamish that's an exciting prospect, isn't it? If you're this a family business, maybe you're the CFO in the family business here, you bring in that private equity expertise, the pace, the scale, the knowledge and the opportunity to grow the business exponentially as well. Is that a motivating factor, do you think, from the business's perspective?
Hamish [00:20:31] Absolutely, yeah. I mean, and I think what you're touching on there is is an alignment of objectives, you know, so when the deal is done, ensuring that the management team of the remaining founders, owners who work within the business are- have the same, the same objective and the same or similar rewards at the end of it, then I think that makes for a good, positive relationship.
Jon [00:20:55] And your own experience, Hamish, have you found that you know, your experience versus the perception, you know, of the idea of somebody else coming in and having a say in your cherished business. That can be a difficult- a difficult thing to overcome.
Hamish [00:21:11] It can. But I think as long as you're clear on their intentions and it comes back to those aligned objectives, i.e. you all want to, you know, double, triple your money then then I don't think there's any- any doubt as to the intentions. What I will say, though, is, you know, I have seen it where those those objectives are not aligned and that- and that is a recipe for disaster and it does lead to not a- not a particularly good board management relationship. So I think that's that's that's pretty pretty clear. And I think most these days, you know, most PE firms are cultured enough to realise that.
Jon [00:21:50] And we've you know, we've challenged the position of the private equity investor here. But what about the firm? You know, what entrenched views have you seen on that side that maybe need to change to recognise the potential value of PE investment?
Charlie [00:22:03] Yeah, that's something we see quite a lot from companies that have learnt from management teams that haven't had much experience of private equity, but have, you know, read the papers. And I think going back to that perception, I think the broad the mainstream media, you know, picks up on a story and if you think of middle market private equity, by and large, transactions go quite well. And 'well didn't that go quite well?' is not really- it is not a great article, that's not a great header. And so, so when- when a large deal goes wrong, that's a story and those tend to be the stories that get picked up on. And as a result, business leaders sometimes, you know, that- that can be all they know about, all they know about the industry. So we do spend a lot of time just educating and- and also, you know, being open, meeting people, making introductions and sort of demonstrating that much of the market or just very human, decent people to deal with. And it's not as it's not as opaque as as you might, as you might think. It is quite an accessible industry in the end.
Jon [00:23:13] And Kirsty, just a final quick question on this to you. Has the pandemic left you more or less bullish about deal making as you look forward? Where where do you sit now?
Kirsty [00:23:25] I'm not sure it is more or less bullish, but it is definitely bullish. We continue to see great opportunities, great businesses with opportunities to continue growing. We've actually continued to do deals through the pandemic. We have completed four new investments since last June. And, you know, we think the COVID period if we try to find some silver linings that are definitely opportunities that have arisen because of that. And actually business owners having a period to reflect and think about, maybe they would derisk, there are advantages to bringing on board a partner as well, that this could be a good time to- to do that in a private equity transaction.
Jon [00:24:01] So I think most certainly with regard to our family business, thinking about PE backing would be suggesting that they take it seriously and have a proper conversation, communication again. But the option to consider PE backing, certainly one it should be considering. It's been great speaking to you all on both of these different challenges. I would like to finish up, though, with a top tip from each of you as well. So, you know, what piece of advice would you give to a middle market business thinking about getting involved with private equity investment? Kirsty, I'm going to come to you first. It's a fairly binary thing. I mean, you can you can maybe give us a couple of different answers. But what would you, a single thing would you say to a business that's thinking about this?
Kirsty [00:24:47] And my point goes back to Charlie's point actually, about the specialism that's developed in the market. You know, as private equity has matured, it's become hugely varied. The firms, the strategies, the style, the culture. And that's great for business owners but it's also massively complex, coupled with there being a massive decision for the business owner themselves to take. So my advice would be to take advice. And I would say that even if Charlie wasn't sitting here in the room, they take that advice, take your time and and take references with the people that private equity firm has worked with before.
Jon [00:25:20] Kirsty, thank you. And Hamish, your single piece of advice – the CFOs hat on.
Hamish [00:25:27] What can you indulge me to, it is actually build on what Kirsty Charlie have said. So I think really do your homework. They are all different. And, you know, if you're an owner manager who is set on growth and then you do a deal with a private equity house, who does turnaround in cost cutting, you aren't going to get along. So, you know, that's that's obvious. But, so know what the thesis is, what their investment thesis is, really understand it. I think the other one is, is do be prepared to invest a lot of time in the relationship with the board. You do need to provide visibility. It is a change from, if you're an owner manager, you haven't had a boss, you've got some VC people who have, you know, dropped in every now and again. But, but this is different and so you do need to invest time in that and I think if you do that, well, then you will start it would be a start, a good relationship and for that, you do need, you know, a good finance function for one thing.
Jon [00:26:26] Hamish thank you very much and Charlie, I'll leave the last word to you, your tip for PE involvement.
Charlie [00:26:32] Mine would be around, actually information, because I think if you are going to engage with a private equity firm, fairly soon you're going to be needing to give them a lot of- a lot of visibility of the business. They're bright people and they'll pick up how the business works and operates very quickly but they won't be able to understand your business as quickly as your biggest competitor. And as a result, they'll ask a lot of questions. And so once, once if you get to the point where you've decided we are going to engage in private equity, you're going to think about it, be aware that there is a big demand on information and the preparation, as with making any large business decision, preparation is really important. And the preparation to engage with private equity does require pulling together a lot of information. And if you can do that and do it well, then the whole process goes really, really smoothly.
Jon [00:27:23] Well, it's been an absolutely fascinating discussion. I feel I've learnt a lot about private equity, just listening to the three of you on this discussion. But unfortunately, we're out of time. But thank you all very much. Kirsty, Hamish, Charlie, thank you very much indeed. And if you want to find out more about private equity, then please do get in touch with Charlie or a member of the PE team at RSM UK. You can visit our website too, that's rsmuk.com. And we're always keen to hear your views so please do rate us and leave a review. And to stay in The Loop, please subscribe to The Loop and listen to our next episode where we will untangled more of today's big business issues.