Behind many successful companies there is probably a great private equity fund, and I have the case studies to prove it. I’m sure many entrepreneurs may disagree with my statement- including those that have tried partnering (unsuccessfully) with private equity funds both inside and outside of the MENA region. But consider that all of the following regional corporate leaders (just to name a few) have been backed by private equity (PE) during a stage of their journey: the region’s number one business portal Zawya, the region’s number one courier Aramex, the market leader in regional interior contractors Depa, the leading regional water engineering outfit Metito, the top regional radiology center chain Technoscan, the premier lab chain AlBorj Labs, the region’s top low-cost aviation brand Air Arabia, and finally, Kids First Group, the foremost regional nurseries chain. The list is endless, but those are the easily-recognizable MENA players that have demonstrated serious achievement across industries.
One of the least acknowledged –yet universally substantiated– facts about private equity is that it improves the prospects of success and growth by providing smart money for companies. A recent Ernst & Young report on the performance of private equity backed companies in the U.K. revealed that on average, PE backed firms had faster growth in revenues, profits, employment and productivity compared to economy-wide measures and listed companies.
A company we had invested in a decade ago was a successful secondgeneration company founded in the 1960s. The business was a regional leader in the water sector, and was performing well by all measures. Its founders and management were on top of their game and globally recognized, yet our involvement and support allowed this company to reach global prominence. Their revenue quadrupled, and their profits increased by a factor of ten. Currently, that very same company’s operations extend from China to Morocco. Success fuels success: Investors, banks, and financial institutions are queuing now to fund its global expansion. In a more recent investment in a nascent but very well managed educational company, we were able to take a local small-scale operation and help it become a regional corporate leader in a matter of three years by lining up and funding acquisitions across the region. Growing at more than 80% yearly, banks lined up to fund its growth. First real estate developers invited the company to participate in their new communities, then talented principals and managers were keen to be part of their new found success. In both examples, private equity role was complimentary -but critical- to that of the founders. It brought financial backing to the table that few founders have easyaccess to, and are generally not capable of generating on their own, despite obvious merit. But besides the deep pockets, a well-established fund brings with it strategic support, highlevel contacts, global business development capabilities, access to bank loans, and a wealth of experience. It is a win-win partnership between the smart money of a private equity fund, and the vision and hard work of an ambitious founder.
Admittedly, there is a caveat: Not all such partnerships are destined for glory. Some have failed due to lack of understanding of the nature of the relationship between partners of different stripes. Here are few tips on how to make your next private equity partnership work better for your company:
1. PARTNER WITH THE BEST There is a wide discrepancy in performance of different private equity funds. There are few that are good to great, a few that are very bad, and the bulk hover around average in terms of all the factors discussed. Don’t let the fund choose you, it’s better if you choose the right fund. Hook yourself to a star private equity fund that has a track record of success.
2. FOCUS ON VALUE-ADD MORE THAN VALUATION More often than not, entrepreneurs focus on the valuation of their company before focusing on the other value-added qualities of the incoming private equity partner. And here is the dilemma: The best private equity funds will be the least willing to overpay for their investments. Remember, keeping your eye on the prize doesn’t mean eyeing the dollar signs.
3. ACKNOWLEDGE THAT PRIVATE EQUITY FUNDS HAVE DIFFERENT AGENDAS Negotiating with private equity funds is a frustrating endeavor. Their conditions, limitations, risk-averseness, short-termism, and business conduct seems to be at odds with the character of most entrepreneurs. In order to succeed, lead the negotiations and propose win-win solutions. At the end of the day, private equity funds are simple to satisfy- just deliver for them financial returns over the years. It is a love story that is destined to end amicably in few years, so manage it as such.
4. IT IS A LONG-TERM PERSONAL RELATIONSHIP, NOT JUST A BUSINESS CONTRACT Whatever deal you ink with your new private equity partner, the paper contract will soon fade away, leaving only the reality of the personal relationship. In this regard, the stability and the longevity of the private equity team is critical. You don’t want to deal with a new person every month, for obvious reasons.
5. TRANSPARENCY IS KEY FOR LONG-TERM TRUST Do put in the effort to continuously inform your partner, and avoid any situation that may question your integrity or create any misunderstanding. Trust takes years to build and only a day to demolish.
Most, if not all, entrepreneurs will require access to funding as they head toward business success. There’s no point in highlighting that private equity funds think and act differently than entrepreneurs; it’s clear that they are genetically different. But private equity, with its focused and experienced fund managers, remains the best-suited form of funding, especially in the early stages of company formation, and the onus of choosing the right private equity partner -and consequently ensuring the partnership success- remains on you as the entrepreneur.