The potential of private investing: why private equity is a strategic choice for SMEs

When it comes to investigate the strategic actions that private firms could implement to fully express the potential of their business, and to develop their presence and market share in the industry, private equity (PE) is not always the solution that both experienced entrepreneurs and start-uppers question. Such attitude is rooted in a traditional assumption that private equity firms mainly cover buyouts, and that General Partners are fully oriented towards high yield operations, to maximize the interests and wealth of Limited Partners only.

It is known as dealing with private firms accounts for a greater risk-taking activity, primarily because of the illiquidity of such asset when included in an investment portfolio. However, private equity fund managers provide, to both sides of the operation, great convenience: investors seeking for higher returns and diversified financial instruments are content with providing capital to finance the opportunities, which are seek and found by private equity fund through a meticulous scouting activity.

On the other hand, entrepreneurs from a small fast-growing firm up to more mature companies gain access to an alternative source of capital, provided by experienced managers who are willing to achieve the full potential of the businesses, both for firms’ growth and to succeed in the PE fund capital allocation.

Nonetheless, the activities of private equity funds in the actual business environment are far from being merely oriented towards high returns. That is because private investing is not only explained by providing capital to firms and the appointment of an external CFO, placed within the company to monitor the financials and the achievement of the promised returns to Limited Partners.

Rather it deals with loyalty, reciprocal trust, hence with the existing differences among people involved in the operation and their interests.

Private investing deals with loyalty, reciprocal trust, hence with the existing differences among people involved in strategic operations.

If PE due diligence is becoming greatly comprehensive in the perusal of businesses, with respect to the financial buy side due diligence, what enhance the intervention of a private equity fund is a multi-level approach that some managers are performing.

Indeed, the inefficiencies that old-styled PE funds could encompass when dealing with not publicly listed companies, with minimal information available and a possible lack of strategic or operational competences, are tentatively surpassed by assisting entrepreneurs and business managers and by achieving a full alignment of all the stakeholders crucial to succeeding.

So that, PE funds are applying a strategy focused on supporting companies in the generation of value, taking on a wider definition of the latter. As a matter of fact, value not only affect the earning assessment, to evaluate the business capability in producing financial value, moreover it impacts the assessment of the different drivers that could guide and determine the achievement of the strategic objectives.

The comprehension of such drivers and values is performed through the draw up of a synthetic document, the Business Plan, which is paramount, both to communicate the projection of a company’s figures over a time horizon, and to understand the new strategic and operating conditions, would some of the assumption laid down in the project be verified.

The Business Plan will have to describe the characteristics of the enterprise, enhancing its fundamentals and unique features, and the industry of reference, taking on an inside out approach to illustrate the dynamics within the sector and the competitive arena that the company is already facing, or will face because of the development of new business units or the launch of new products and services.

Indicating the accounting paths along the horizon of the Business Plan must be coherent with the managerial dynamics connected to the development of the enterprise. Hence, the contribution of PE fund managers in assessing the human resources of a potential target is pivotal to gain access to the organizational structure and governance processes, areas that must be analysed because of possible resistance to cultural and operational changes.

The Business Plan should be balanced, complete, sustainable, supported by objective elements, and it should describe the business idea, and the growth objectives, either without falling into excess neither giving up the right ambition, entering the merits of the specific management and governance actions that will be implemented.

Once the Business Plan is elaborated, and its reliability tested through sensitivity analysis on different scenarios, this document will become the reference for an ex-post monitoring and control of the activities, comparing actual versus forecasted values to evaluate the goodness of the performance or the contrasting actions to be applied.

Such activities are intrinsically linked with the overall sustainability of both the plan and the investment itself, and a paramount role could be played by the transparency and trustworthy relationship between the PE funds and the company’s key figures.

In this regard, it emerges how the drafting of Shareholders’ Agreements become essential to define the condition of a long-term relationship that entails the participation of a PE fund in a firm: each Shareholders’ Agreement is tailor-made at the end of the contracting cycles between the parties, and varies according to the type of transaction, the nature of the shareholders and the objectives shared in the Business Plan.

Some of the recurring elements, which can be considered common to all Shareholders' Agreements, can be summarised as follows:

  • Representation of the PE fund in the Corporate Bodies (member of the C.D.A. and of the Board of Statutory Auditors);

  • Appointment or approval of the Statutory Auditor and the voluntary certification of the financial statements;

  • Introduction of key figures, if missing in the organizational chart, such as the CFO, CEO, COO;

  • Rights to periodical disclosure on the performance of the company in relation to the Budget, the Business Plan, with an analysis of the deviations and any corrective actions that are intended to be taken;

  • A set of subjects where the PE fund might have the veto power, for which the resolution requires the consent of the financial investor;

  • The condition of the exit strategy for the PE fund.

The abovementioned activities require longer assessment period for the eligibility of possible targets for the PE investments, and first and foremost to run a due diligence on people, which could represent the most intriguing and challenging operation performed by PE fund, and by entrepreneurs vice-versa.

Unveiling the day-by-day activities carried-out by PE firm is not the topic of the current reading, rather how the relationship between private counterparts might result in a win-win strategy to reach high performing results, new managerial standards and attitude, and above average return for PE funds, a precondition to attract a greater flow of capital from a variety of investors, seeking alternative investment opportunities in the vast and miscellaneous panorama of the private SMEs.


These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.

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