Private equity (PE) investment activity in Ireland has been very robust in recent times. Pitchbook found that 137 deals and 34 exits were completed last year, with €1.8 billion invested by 160 private equity investors in Ireland.
These investors provide capital and expertise, but they also expect influence in decision making to ensure they get the returns they want. And that’s where tension can arise. Of course, getting to that point requires a business that is appealing to investors in the first place.
“The most attractive investments combine a proven commercial track record with multiple opportunities for future value creation, whether through organic growth, acquisitions, operational improvement or international expansion,” says Stephen Kane, head of corporate advisory at Goodbody.
That appeal depends on more than a company already performing well but also a clear pathway to increasing value. That’s why the quality of the management team matters when it comes to securing investment. Investors are investing in people as much as numbers.
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“An experienced and deep management team that will drive that growth,” says Colm Sheehan, partner in corporate finance at Crowe.
“Ultimately, private equity investors are backing both a business plan and a management team, so the quality of management, the credibility of the growth strategy and the cultural fit between the parties are crucial,” says Eimear O’Hare, director at BDO Dublin.
Of course, some sectors hold more attraction than others. “Ireland’s domestic industry attracts opportunities for investment by consolidators funded by private equity in professional services, infrastructure, hospitality, and entertainment,” says Ken Casey, partner and head of corporate at Hayes Solicitors.
“Investors value strong management teams, attractive sectors, good growth prospects, resilience and a clear exit strategy,” says David O’Kelly, partner and head of mergers and acquisitions at KPMG in Ireland. “Investment in AI and the data centres sector has attracted vast amounts of capital in recent years and continues to drive significant levels of activity. Conversely, with some concern about the impact of AI on traditional software businesses, many investors are now also looking to invest in companies that are seen as being less impacted by AI and automation. For example, we are seeing significant investor interest in the healthcare, professional services and industrial sectors.”
These investors expect value to rise quickly to influence a greater exit price.
“Private equity investors are typically targeting annual returns in the region of 20 per cent or more on an investment, often alongside a goal of doubling or tripling their money over a three to five-year investment horizon, sometimes longer,” says Siobhan Donlevy, corporate finance partner at EY Ireland.
Of course, expectations vary depending on the approach taken by PE and the sector involved.
“There is no single return threshold, as expectations vary depending on the investor, type of investment, level of risk and the type of business,” says Kane.
Then there is the matter of control. “Private equity investors take different approaches, but most will seek to introduce significant protections for their investment through consent requirements in relation to significant changes to and decisions in the business, its governance and capital and debt structure,” says David Mangan, partner in corporate at Hayes Solicitors.
What that control looks like can vary considerably. “Most private equity investors will look to acquire a majority stake in the business, thus controlling the board and having final say on any key strategic decisions,” says James McMenamin, partner in corporate finance at PwC.
“Most investors have fundamental items that they require in a deal such as the ability to influence major capital decisions, leadership changes and the ultimate sale of the business,” O’Kelly notes. “Beyond these items, the level of involvement in strategic items and decision making will vary by investor. Taking time to align on these topics before a deal is essential for a good working relationship.”
Deals for a minority shareholding tend to be different, with founders retaining overall control while the new investors retain some protective rights over big decisions. Of course, the investor brings more than money to the table.
“If control is a key issue for a company, some minority investors may be willing to have less influence on board matters in exchange for greater certainty on their exit and returns,” O’Kelly says.
“While the funding capital can be easily quantified, the intellectual capital can often be the more valuable asset that PE brings to a business,” says Sheehan.
When PE is brought in, it’s more than a straight transaction of part of the company being sold for cash. Investors tend to have vastly more experience in acquisitions and governance than the founders they are working with.
“For founders and business owners, it provides an opportunity to realise part or all of the value they have created, allowing them to de-risk their personal financial position while often retaining an equity stake and participating in future growth,” says Donlevy.
This aspect allows founders to take more commercial risks as their personal finances are less directly tied to the success and failure of the business. All the same, there are trade-offs.
“Private equity should be viewed as an active partnership rather than simply a source of capital,” says O’Hare.
On the founder side, that likely means a stricter approach to reporting and increased accountability. The investors will likely also have their own timetable for the investment and may expect an exit at a certain point.
“As a general view, if a company thinks that a potential partner will not add value around the board table, they are probably not speaking with the right party,” says O’Kelly. “With significant amounts of private equity available to deploy, a company should target identifying the partner which fits with the company’s culture and objectives. For companies that would prefer to limit outside involvement at board level, there are a range of debt options that come with less direct control over governance, provided agreed financial performance is achieved.”
