Monitoring the investment
- Monthly management pack
- Weekly / daily KPIs and on-line reporting
- Informal reporting and communication
- Seat on board / board minutes
- Consulted on (with right of veto in some circumstances) on key decisions affecting company
- Aims to add value to investment (eg expansion into new markets/overseas, intros to customers and strategic partners)
- Shares best practice amongst portfolio companies
- Acts as a business partner (if “Hands-On”).
Board composition and investor involvement
Executive directors: CEO/ FD etc – performance and strategy
Operating board – departmental reps
Non-executive directors (NEDs) – investor rep, independence, add value, guide and influence
Investor rep -
- original deal team: understanding of company and strategy, developed relationships, or
- dedicated, specialist aftercare team: sector, operational skills, impartial
Danger Signs
Lack of response to changing environments
Stress/dissent within team
Fixed price contracts
Increasing fixed costs
Cash flow issues
Bank covenant breaches
Failing to meet interest payments
Failing to meet dividend payments
Increasing overseas competition
Over-trading
Deteriorating credit control
Uncontrolled capital expansion
Inaccurate / late management accounts
Autocratic management
Financial impropriety
Early success but no staying power
Over-expansion
High turnover of employees
Extravagant executive lifestyle
Dependence on too few customers/suppliers
Dealing with underperformance
- Pre-investment / due diligence shortcomings
- Management shortcomings
- Competitor action
- Failure to achieve plan
- Anticipate problems
- No (bad) surprises!
- Analysis of issues: internal / external
- Take action!
How VCs add value
- Sounding board for strategic and development decisions – entering new markets, overseas expansion, acquisitions, hiring new management
- Introductions to potential customers, suppliers, headhunters, acquisition candidates, even other VCs
- Negotiating future financing rounds with other VCs
- Softer skills in coaching and mentoring entrepreneurs and teams
- Provide credibility/status and focus and support
- Studies by EVCA and BVCA confirm the recognition of this support by entrepreneurs and management teams
- No longer just turn up for board meetings!
Experience, Aspiration and External Resources - key drivers of success of VCs (EVCA - LBS, CEFS)
LOOK AT MODEL
- Experience
- Reputation
- External Resources
- Business Model
- Entrepreneurial experience
Management teams working with PE/VC Firms
Work in true partnership with lead investor - be transparent.
Listen to the VC firms advice and validate it - they can help identify issues ahead of time
Hire the right talent at the right time - don’t compromise on quality of management
Be open to advice from investors
Have a clear plan to achieve sustainable growth in the medium and long term - not just short term
Demonstrate a strong focus on cash management and actively restrain cash spend
Prepare exit strategy early to maximise value for shareholders
External investor = eventually selling your business via trade sale or flotation
Remember that the aim is to achieve maximum long-term value for the ultimate purchaser as well as management and VC.
Exits
Trade sale – to another industrial company
Secondary buyout – by another PE institution
Repurchase – of PE firm’s shares by company
Going public – stock exchange listing (eg AIM or Main Market in UK)
Involuntary – receivership or liquidation
Trade sale
Welcomed by investors:
- likely to obtain premium from buyer
- competitive bids maximise price achieved
- cash paid for purchase, rather than shares
Potential conflicts with management’s interests
Going Public in UK
LSE
- Main Market
- AIM
-High Growth Segment
Aquis Stock Exchange (AQSE)
Special Purpose Acquisition Companies (SPACs)
Advantages of going public
- Realisation of owner’s capital
- Finance available for expansion
- Marketable shares available for acquisitions
- Enhancement of status and public awareness
- Increased employee motivation via share incentive schemes
Disadvantages of going public
- Possible loss of control/unwelcome bids
- Continuing obligations – costs and management time
- Increased scrutiny from shareholders and press
- Perceived emphasis on short-term profits and dividend performance
- High costs of gaining quotation
London Stock Exchange admission criteria: AIM
- No minimum shares to be in public hands
- No trading record requirement
- No prior shareholder approval for transactions (except reverse takeovers)
- Admission documents not pre-vetted by Exchange nor by UKLA in most circumstances (prospectus not required)
- Nominated adviser (Nomad) required at all times
- No minimum market capitalisation
Lighter regulatory process
Companies outside UK looking to list on AIM
London Stock Exchange admission criteria: Main Market
- Minimum 10% shares in public hands (reduced from 25%)
- Normally 3 year trading record required
- Prior shareholder approval required for substantial acquisitions and disposals
- Pre-vetting of admission documents (prospectus) by UKLA
- Sponsors (investment bank) needed for premium listing
- Minimum market capitalisation at least £30m (was £700k)
Better liquidity than AIM
LSE High Growth Segment
Opened 28 March 2013
- New route to UK IPO market for high-growth companies
- Includes reformed rules on free float, eligibility criteria and reporting requirements
- Acts as “launch pad” for companies seeking full listing
