Drawing on our own expertise and that of leading insurance PE investors, B.P. Marsh and Apiary Capital we reflect on what a PE investment can mean for entrepreneurs who decide to stay on and continue to drive the business.
Private equity (PE) can be a game changer for entrepreneurs, adding more than just financial support. It comes in many different shapes and sizes. It can be a minority or majority investment. It may involve considerable engagement or a more passive partnership. And the commitment may be short- or long-term. That means the process of choosing the right PE partner and what you want out of that relationship is very important.
What do PE firms look for in insurance intermediaries?
PE firms often aim to back management teams. So what are they looking for in the partnership? “We look for a credible management team who we can work with, underpinned by a robust business plan, in terms of underlying assumptions (market share, growth)” said our experts. The business’s strategy could be M&A, digitisation, new products or just organic growth. What’s important is having a strong, aligned management team that can drive operational improvements, execute growth strategies, and navigate market challenges. PE firms invest in companies with the potential for value creation, and the management team’s expertise and leadership are critical in realising that potential.
A consistent theme in all of the conversations we have at PKF with PE firms is the commitment to support management to help them create this value, and it was something that both BP Marsh and Apiary emphasise; “We look to invest in people and help support with what they need to help deliver this plan”.
So what else influences PE investors? They want to see strong, recurring revenues and markets that are big enough to grow – elements that are often present in insurance intermediaries.
What support can PE investors provide?
- Capital support. One of the benefits of PE is finance or access to credit to support acquisitions – whether for M&A, scaling operations or expanding into new markets.
- M&A strategy. When considering or continuing with an M&A strategy, the PE firm may give support either through their own team or by putting an M&A team into the business. It may also provide access to deals, though often this is driven by the entrepreneur themselves, especially if they have strong links to the market.
- Strategic guidance and expertise. Whilst PE firms bring a wealth of knowledge and experience, most industry expertise will come from the entrepreneur’s own management team. Some investors have large operating teams to support the business, but many that we work with do not. Support and guidance from the PE principals can be invaluable, and they may also bring in one or two key individuals (often as NEDs) to provide guidance or access to information, people or expertise that the management team doesn’t have.
How to balance change and stability
Although PE firms are sometimes expected to make substantial changes, this is often not the case. The approach depends on the nature of the management team and the PE firm’s investment strategy. In many cases, preserving the company’s existing culture and processes is essential to maintain stability and guarantee growth.
Often the business has a clearly defined growth strategy and just needs support to achieve it. Typically, where changes are made these are to boost growth and enhance the management of the firm. This might include:
- Back office and finance. This is often an area where change can occur. This is more likely to involve providing funding to support additional or more senior staff, rather than changing the business fundamentals. This brings expertise in-house and enables the business to grow. Where the business is a start-up or scale-up, the PE firm may look to provide direct support “akin to an outsourced head office that allows management the ability to focus on growing the business’’. Meanwhile, the PE firm can carry out less exciting roles such as financial management, governance, and systems and controls.
- Performance metrics and digitisation. PE firms often aim to improve financial reporting. “This isn’t to put a burden on the company but rather to create systems and data that can be used live by management to run their businesses more efficiently and successfully.” This is often done by bringing in new or complementary systems to digitise the business and help it to use data more effectively.
What to expect when plans change
Business plans don’t always go the way everyone expects, often through no fault of the business. This may be because of a market downturn, such as the one caused by the pandemic.
Whilst PE investors and entrepreneurs are often aligned in their thinking, it’s worth remembering that PE firms’ key aim is to invest in your business to make a return. That means some may look to take a more proactive approach and get more involved when you are struggling – whatever the reason. That’s why talking through with your potential PE investor their approach to supporting you when the business plan isn’t working is so important.
Entrepreneurs can expect PE to provide not only the financial resources needed for growth, but also strategic and operational input. How this is done will depend on your requirements and what you need from the investment. So it’s vital to identify what help you really need before engaging in discussions with an investor.
If you would like to talk through what PE investment may mean for your business, please contact Will Lanyon.
