A huge number of private equity and venture funds – domestic and international, offering structures and products across the capital spectrum – have been increasing their activity in the Irish market in recent years.
These funds have been drawn to a growth story based on a relatively buoyant economy, a highly educated workforce that drives innovation and entrepreneurship, and a proactive approach to internationalisation due to the small size of the domestic market, proximity to the UK, access to the European Single Market and a tradition of US expansion.
Indeed, it is widely accepted that Irish companies tend to become exporters sooner than many of their overseas counterparts.
Business owners benefit, management teams benefit, and the funds benefit
Institutional investors continue to invest in Irish funds, attracted by recent Irish private equity success stories.
One of the interesting features of the Irish market today is the maturing of the native private equity sector. Funds such as Cardinal, MML, Melior, Renatus, BGF, Development Capital, Erisbeg and Causeway have been exiting investments made over the last few years through sales to other private equity houses or by trade sales to international buyers.
By and large, these investments have proved highly successful for both the private equity funds and the companies involved.
The capital injection and expertise brought by the funds have driven strong growth.
Business owners have benefited from enhanced valuations of their remaining equity, management teams have benefited from the incentive schemes put in place, and the funds have seen a stellar return on their investment.
These positive experiences have brought about a profound change in the landscape for investment in growth-oriented Irish companies.
Whereas at one point there was strong resistance by Irish entrepreneurs to surrendering equity in return for capital investment, this is now seen as a normal part of the growth journey.
These funds provide the capital needed for long-term growth, enabling ambitious owners pursue opportunities through organic expansion or strategic acquisitions while mitigating personal risk.
If taking on investment, preparation and the right funding partner are key
They also offer flexibility and opportunities for realising value beyond traditional methods such as trade sales or MBOs, especially if owners do not intend passing the business to a family member.
Recent data released by the Irish Venture Capital Association’s (IVCA) VenturePulse quarterly reports revealed that 2023 was a year of ups and downs for investment into the Irish SME market.
While it was a positive year for startups looking to raise less than €5m, there was a marked drop in funding for firms seeking larger amounts.
Deals in the €5m-€10m range fell 26pc in 2023 and more than halved in the fourth quarter. These statistics highlight the challenge businesses can face to secure funding.
It will be important to ensure they position themselves to utilise the domestic and international private equity market.
If considering taking on investment, preparation and the right funding partner are key.
Business owners need to ensure they prepare for the scrutiny that private equity investors will bring to their operating model.
In most instances, investors will be backing a team – so strong organisational structures and high-calibre management are essential.
If you don’t already have a strong strategic finance function with an integrated approach to managing performance and budgeting, you should consider putting one in place.
Personal chemistry and ‘fit’ are significant factors
Given that private equity investors focus on eventual exits, the business should have a robust plan with a well-defined strategy and commercial opportunity.
It should outline a pathway to an attractive return on investment and demonstrate credibility.
Finally, choosing the right partners is paramount. While private equity funds share a focus on ROI (return on investment), differences exist in their approach and track record.
It would be important to assess their mode of operation – some will seek to play a very active hands-on role in the running of a business, and this may not sit well with either the current owner or with members of the management team.
Ask for references and speak with other founders who have worked with them.
It would be important to establish an alignment with a potential private equity partner’s view of the business and evaluate their ability to support the agreed growth plan.
Moreover, personal chemistry and fit are significant factors given that you will be working closely with them over the next number of years.
John Bowe is the corporate finance partner with Mazars