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Case Study: Finding the Right Private Equity Partner for Growth and Profitability

Written By: Gerald O’Dwyer III 

The PE Guru — Blackmore Partners, Inc | June 22, 2024

You’ve you found an owner with a growing business and have decided to bring in an investment partner to fund the deal, but how do you find the right fit? This is a critical decision that can significantly impact the future of your company. The process involves understanding the balance between profitability and growth, the specific needs of your business, and the characteristics of potential private equity (PE) partners. Over the last 12 months you had 200 + meetings with Private Equity firms.  Through your BlackmoreConnects conferences you also have access to the Pitchbook PE database of 20,000 PE firms.  Now comes the time to put you BlackmoreConnects knowledge in to the test.

The Dilemma: Profitability vs. Growth

A common question in the investment community is whether investors are more interested in profitability or growth. Early-stage and venture capital investors often prioritize growth-at-all-cost strategies. However, for businesses that have moved past the early stages and demonstrated profitability, this approach can feel misaligned.
Private equity investors are sometimes perceived as being solely focused on profitability due to their use of leverage and the associated debt load. This perspective can lead to concerns about sacrificing growth potential. The reality, however, is that not all PE firms are the same. There are growth-focused PE investors who understand that long-term success requires a strategic balance between growth and profitability.

BlackmoreConnects’ Approach

BlackmoreConnects assists executives in finding established businesses and taking growth to the next level. We don’t see profitability and growth as opposing forces. While it may seem like there’s a short-term trade-off between the two, they are harmonized over the long term. Matching the PE firm to your growth thesis is essential.
To maximize long-term growth, investments for scale need to be made upfront. This can pressure near-term profitability, but if done by design, it ensures funding is aligned with your growth objectives. Profitability and growth are often seen as opposites, but ideally, they coexist harmoniously.

Understanding Private Equity Firms and Their Investment Criteria

Risk Management
PE firms conduct thorough due diligence to assess market, operational, financial, and regulatory risks. Strategies like scenario analysis and stress testing help mitigate potential downsides.
Value-Based Approach
PE firms focus on acquiring undervalued or underperforming companies with potential for operational improvements, market repositioning, or strategic growth, aiming to unlock value through active management.
Investment Timeframe
Typically ranging from three to seven years, this timeframe allows for substantial changes and improvements, aligned with exit strategies such as selling to a strategic buyer, IPO, or another PE firm.
Temperament
PE investing requires disciplined and patient management to navigate company transformations, which often involve tough decisions and a long-term focus.
Market Efficiency
PE firms look for market inefficiencies where they can add value through expertise and resources, achieving superior returns by exploiting these inefficiencies.
Market Cycles
Understanding market cycles is crucial, as the timing of entry and exit can significantly impact returns. PE firms aim to acquire during downturns and exit during upturns, requiring keen economic and market insights.

Matching PE Firms to Your Growth Thesis

Example Case: BlackmoreConnects worked with ExampleCo, a company already growing at a strong clip with solid EBITDA profitability. They needed a partner to take them to the next phase of growth. During strategic planning, even before closing the deal, we discussed scaling their sales organization faster.
We collaboratively developed a plan to invest in a new CRM system, HR management, recruiting, and onboarding processes. Though initially daunting, our Capvalue team supported them, leading to significant growth. Headcount more than doubled in two years, and the company increased bookings by over 100%, integrating three acquisitions within the first few years of PE ownership.

Key Principles for Executives

  1. Identify Your Needs: Understand whether you need a partner focused on growth, profitability, or a balance of both.
  2. Due Diligence: Conduct thorough research on potential PE partners, assessing their track record, investment philosophy, and alignment with your growth thesis.
  3. Strategic Fit: Ensure the PE firm’s approach to investment and value creation matches your company’s long-term goals.
  4. Long-Term Vision: Develop a three-year vision for growth, working backward to identify necessary investments.
  5. Operational Support: Choose a PE firm that offers operational support, helping you execute growth plans efficiently.
  6. Market Understanding: Select a PE partner with a keen understanding of market cycles and the ability to time investments for optimal returns.

Conclusion

Finding the right PE partner requires a strategic approach, balancing profitability and growth. By aligning your company’s needs with a PE firm’s investment philosophy, you can create a partnership that drives long-term success. BlackmoreConnects emphasizes matching the PE firm to your growth thesis, ensuring that both profitability and growth are harmonized for the best outcome.