How to get institutional investors on board

When an ambitious, fast-growing agency business has established reasonable scale, it’s usually at this point when it starts to look to institutional, often private equity investors, to support its next phase of serious growth; a future that it’s looking to realise.

Private equity investors aren’t the same as angel investors, or the individuals that might have provided some of the ground-floor funding your business needed during its initial phases of growth. They are rigorous professional investors and they expect a rigorous, professional home for their money.

Private equity in London is wider now in terms of the scale of businesses it will invest in – even in cases below the £2m – £5m profit level that was often the baseline in the past – but the governance requirements and professionalism baselines remain unchanged.

It has become a very receptive, very proven community, where a lot of people have already helped generate a great deal of success in the marketing services sector.

Risk and return

Investors naturally need to get a fair return on their investment at some point in the future. And so they need to be confident not just with your business and leadership team, but also with the financial models behind them.

Whilst their aim is return, what they care about fundamentally is risk on their capital. An investor needs to be confident going in that their base capital is effectively banked and that’s harder in the current market given global economic stress.

During the post-Covid growth explosion in Western markets with really tight labour constraints, investors were laser focused on deliverability of growth; where would all the necessary talent come from and how eye-wateringly expensive would it prove to be? That’s not today’s market, especially in the UK.  Right now, the focus is on what is euphemistically known as ‘resilience testing’.  This means asking how well a company will cope with recession and potentially a deep one. 

With this in mind, if your agency is serious about reaching out for investment capital, the senior team must prepare as if they were selling the business rather than going out for bank borrowing. This can be intensive, typically taking six to twelve months to get match fit. 

Proper planning

First, do you have solid financial and forecasting models, based on objectives that your leadership team believes it can achieve? What does the future look like? Where is the business trying to go? What will we need to get there and how will markets move around you?

Any investor will expect a forecast that’s properly structured and tested and based on something that’s real both today and provable based on past performance. This may sound obvious, and often it is, but time and again there’s no real evidence to back up some of the forecasts we see. We advise leadership teams to focus on building a proper set of data points that reflect the levers for growth in the business.

Above all, stand by those numbers, have confidence in them, and know where the risks are. Challenge yourselves on them and make sure you really believe in them.  When you’re clear on your assumptions you can also explain how they might flex in different circumstances and what that would mean for trading and cashflows.  It might not look as pretty as you’d like, but it inspires confidence and confidence is what drives investment.

Inspiring confidence

People and clients are equally as important, so let’s think about the other key questions a potential investor might have. Is the key management team fixed in place and there for the long-term? Would anyone from key management not want to continue post a deal? What about succession planning? Is there a properly contracted client portfolio? How solid are those client relationships?  There’s no such thing as a wrong answer, albeit different answers will influence appetite and valuation.  The only wrong answer is a vague one.

And finally………..

Some elements of our sector still have some outdated attitudes when it comes to investment and the private equity community, in particular. If some of the following points sound familiar, then it’s time to re-evaluate!

  • Not taking funding to grow a business is not a badge of honour. We hear that so often when people come to us – one of the first things they boast about is that they’ve never had financing. That’s like sitting in front of someone and saying ‘I didn’t buy a house until I was 50 because I didn’t want a mortgage’.  Were there really opportunities for significant growth in the past and what’s the true growth appetite of these people if they didn’t have clear and sound reasons for not acting on them?

  • Private equity is often viewed with suspicion, seen as driving businesses hard for growth, no matter the cost.  Ultimately any investor placing a bet on a service-based company is backing its people as they’re the only long term assets.  Trashing the people is trashing your investment.  Management teams of private equity backed businesses can sometimes be their own worst enemies. They can fall into the trap of looking for conflict that simply isn’t there. Don’t imagine it or obsessively go looking for it, because if you do too much of that, it will appear for you.

Ultimately, investors want to be able to solve things for people. They want to be partners in all senses of the word, not just financial enablers, working with you to drive business success and a better future for you, as well as the value of their investment. It really can be that simple!

Jim Houghton

Post by Jim Houghton

Partner at Waypoint Partners

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