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More than just capital
10/06/2008. Source:Barclays Private Equity. Dr Peter Hammermann
 The search for a suitable investor can be difficult for small and medium-sized companies. However, the chances of successful collaboration increase if several important criteria are met during the selection process, writes Dr Peter Hammermann, co-head of Barclays Private Equity.
 Thanks to their flexibility, innovative power and their often above-average potential, companies of medium size are an important target group for financial investors. In the past, Private Equity has already enabled many of these companies to pursue substantial further development with significant improvements in their performance. There will be no shortage of opportunities for successful collaboration in the future.
In Germany, for example, where the investment sector invested € 4.1 billion last year (2006: € 3.6 billion), the highest amount overall since 2000; small and medium-sized companies attracted a large part of the total of 1,078 new commitments (2006: 970). This is due to the fact that takeovers worth two or three hundred million Euros suffered less from the turbulence in the credit markets than those transactions worth more than one billion. Also the sustained interest of the SMEs in financially strong equity partners plays a role, as Private Equity is frequently an essential prerequisite for implementing growth strategies. Thus a company can position itself better via acquisitions as part of a buy-and-build strategy, acquire technologies and reach new markets or customers. In Europe exist plenty of top-notch companies that meet the necessary conditions. However, they only really benefit from investment capital if they find reliable partners that match them well and whose competence goes far beyond the mere acquisition of shares.
In view of the current financing environment, investors are in demand who seek success together with the management but without the use of risky leveraging. The key factor is a high degree of experience and professionalism.
Based on its track record, it is also possible to check whether a financial investor has carried out comparable transactions in the past and whether he has consistently pursued his strategies. As a rule the following applies: investment funds with a larger portfolio are generally not at risk of needing to sell in the short term due to liquidity squeezes or negative developments of individual investments. In such funds the risk of undesirable external influences on the holding period is thus minimised from the very beginning.
Nevertheless, a cautious entrepreneur will obtain additional information whether an investor proves to be constructive in contract negotiations and during the period of his commitment and reliably sticks to the agreements.
For future success it is an essential prerequisite that the investment company understands the business model of the company and recognises its development potential. If the chemistry between the negotiating persons is also right, a genuine partnership is possible. The potential for unleashing the forces of success increases if the financial investor offers persuasive concepts for involving the company management in the investment structure. Because entrepreneurial freedom and responsibility, like direct participation in success, ensure additional, unquantifiable motivation among management staff. Additional incentives for the other company employees contribute to further motivation beyond the management level. Such structures can be designed based on variable components, for example, which in the end facilitate a rise in income. All of these factors together frequently result in the jointly agreed goals being exceeded.
Private equity companies with the relevant competence can contribute to a large extent by providing their expertise to improve efficiency in addition to making capital available. There are plenty of ways to do this. Most corporate processes and organisation can be optimised. Likewise, better professional cash management or controlling and risk management systems focused on greater transparency often contribute to increases in profits.
Beyond that, rapidly growing SMEs in particular require financial investors who support the management as sparring partners in making strategic choices. A clear analysis of the customer needs and the market environment may thus lead to partial sales of inefficient business units. A concentration on products with strong margins or the development of the business through acquisitions is also conceivable. In an initial step, the financial investor can also be of assistance, even if he doesn't push his support, in the analysis of the market environment and the search for suitable acquisition targets. Together with the management, an assessment should be carried out whether an expansion of the product range or access to new regional markets would create additional value.
The most favourable conditions for acquisitions are available in heavily fragmented branches in which market consolidation has not yet been completed and in which takeovers can usually be accomplished without any troublesome antitrust issues.
However, an add-on strategy will only be successful if the acquired companies can be integrated without great friction. Upon request competent investment companies should also be able to contribute their expertise in this process. It is crucial that neither the quality of the management nor the relationships with the customers are damaged. On the other hand, integration measures are indispensable for the optimal exploitation of development potentials and increased efficiency. However, financial investors who truly function as genuine partners do not micromanage the integration of the acquired companies, but leave the relevant managers free rein.
About Barclays Private Equity
Barclays Private Equity is one of Europe's leading mid-market private equity investors. Barclays Private Equity has committed to several promising new investments very recently. The company acquired a 70% interest in the Nuremberg-based Eschenbach Group in July 2007, enabling the supplier of glasses frames, sunglasses and optical devices to take its next step towards international growth. An impressive example of successful expansion in new regions is TUJA Group, one of the largest temporary employment agencies in Germany; in the meantime it has been sold to Adecco. Thanks to an investment by Barclays Private Equity, TUJA made six acquisitions within a short time in addition to strong organic growth, and increased its workforce by 12,000 employees. In the same manner, companies focused on expansion can profit from interesting cost advantages in the course of an acquisition, especially in the areas of purchasing and production. Barclays Private Equity Germany celebrates its 10th anniversary in June 2008. For more information, please visit www.barclays-private-equity.de.
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