What may come as a surprise, however, is that we are just as interested in holding a minority equity stake as we are holding a majority one. In fact, of over 100 institutional deals, more than half are minority positions.
Indeed, we are taking both of these aspects one step further with our new “True Minority” approach, whereby we are actively seeking out 10-25% equity holdings. Indeed, we have already invested in several companies where we hold a c. 20% allocation.
Not many investors actively look at smaller allocations. Why is that?
Most private equity investors invest for majority stakes, or large minorities at the very least. A larger equity stake provides more upside, and the larger the stake, the more “control” an investor typically has.
There is nothing wrong with this model, and you will see a long list of successful management buy-outs that have achieved succession of ownership while keeping the target businesses independent and thriving. Most equity funders are happy with this as a model and just don’t bother with smaller equity stakes.
What is the role, therefore, for Livingbridge in terms of investing in smaller equity stakes?
It all comes back to who has “control”. When a founder-led business achieves a material size, say £10m profit, its shareholders have lots of options.
Many founders will not want to lose control, or the freedom to exit when it is right for them, and maybe they are wary of private equity despite the potential benefits.
But throw a professional, highly experienced investor like Livingbridge – that is genuinely interested in smaller equity stakes with appropriate legals – into the mix, and it’s an entirely different ballgame.
And these larger companies do have equity funding needs. Over the last year, we have been talking to founder-led companies and corporate finance advisers alike, and identified the following three most common drivers for True Minority funding:
- to provide a capital realisation to a founder to diversify their wealth;
- to replace a smaller shareholder who wishes to exit – we refer to these as “stray” shareholders e.g. a relative, a trade investor, a retired co-founder;
- to fund a material acquisition;
But can’t this be delivered by bank debt?
Often it can, and debt does have a role. But many founders we have met are pretty conservative and reserve bank debt to fund the business, rather than to fund cash out to shareholders.
We also find you stand a better chance of structuring cash out as capital under CGT treatment if a new equity investor is involved.
So which situations work best?
As a smaller shareholder, we are not expecting all the rights and controls that we would expect with a much larger stake. This means that we want to invest in larger, resilient businesses making £5m – £30m EBITDA, and those with a strong management team that has already developed its own growth plan.
With 20+ years of experience in supporting growth and helping businesses realise their potential, we do also want to feel welcome around the board table. We have built internal capabilities based on that experience with specialists in areas such as senior talent recruitment; optimising performance through data; and mapping markets for acquisitions.
We don’t expect to use all these to help a larger, more mature business, but we’d be surprised if we couldn’t find some areas of our experience and capabilities that would add value. We want to work with ambitious teams that will expect us to contribute value where it is relevant, and where it is incremental to the company’s own resources.
What does our job with a smaller equity stake entail?
In truth, exactly the same as with a larger stake.
Firstly, to build a relationship with the founders and the senior team – we can’t achieve anything unless we understand and trust each other. Then, to get aligned around achieving a “next stage” for the business. This will often include acquisitions, international growth, product extension or other growth strategies.
This will typically lead to a future liquidity event, which will either take the form of a full sale – where our job is to help maximise the outcome of this – or to help build a plan to attract the next minority investor, when all the shareholders can realise some value if they choose
Either way, the time is spent working together to build a better business, and doing it properly. There are no short-cuts to creating value.
True Minority is simply Livingbridge applying its experience, capabilities and firepower as an investor to holding smaller equity stakes of 10-25%. We have tailored this approach for founders who are not thrilled by the prospect of selling a larger, controlling stake but who still want an experienced, skilled investor to work alongside them.
If this sounds interesting – please feel free to get in touch to discuss this further.