At the start of 2017, it seemed that The Primal Pantry, a manufacturer of fruit, nut and protein packed snack bars, had found the recipe for success.
Founded in 2014 by Suzie Walker so her nutrition clients had a healthy on the go option, the Maidenhead business had, over three years, secured places on the shelves of leading supermarkets such as Tesco and Ocado.
Flourishing international sales to markets, including Holland and Germany, contributed 35% of its annual £1million turnover.
“Then 2017 happened and growth stalled,” says Walker. “We faced intense competition as all of the big manufacturers started bringing out similar products. We had cashflow issues and owed our suppliers a significant amount of money.”
The company downsized and looked at bridging and high-interest loans to bounce-back. But the answer proved to be private equity.
This February, it secured a £3 million investment from NVM Private Equity for an undisclosed minority stake. “We started speaking to several private equity firms last October. We were too small for most and it was recommended we speak to NVM. They were enthused by our great product, engaging brand, our management team, distribution network and customers,” says Walker.
They realised that we had expanded too quickly in a short space of time, but they saw potential for future growth. They have upped the ante regarding the need for full time roles, such as a finance director. “NVM has joined our board and we are soon to appoint a non-executive chairman.”
Walker says NVM will likely stay invested for a few years, growing the firm to such a point to attract the interest of a bigger private equity group or trade sale.
How it differs
Private equity may not be the most obvious answer for expanding firms. Martin Brown, chief executive officer of business advisors Elephants Child, says: “Private equity is sometimes confused with venture capital because they both invest in companies and exit through ways such as initial public offerings. However, private equity firms mostly buy mature companies, whilst venture capital invests in start-ups with high-growth potential.”
Private equity houses invest in established firms they believe have strong growth fundamentals. They could be companies which are growing rapidly, not making the profits they should be making because of inefficient practices, or are deteriorating and in need of turnaround. They typically hold investments for up to five years before an IPO or trade sale.
“We invest in more mature, growing companies, usually with over £1 million annual profits. This minimises the risk of failure,” explains Owen Trotter, managing partner of private equity firm Key Capital Partners.
“Depending on the business involved we invest cash, take a minority or majority stake, restructure shareholdings and management teams, such as adding a sales director, and ensure everyone agrees on future growth strategies. Many entrepreneurs are not particularly corporate, so we focus their minds on professional management such as regular board meetings and forecasting.”
Trotter says he contacts firms directly or is informed of those seeking investment by local accountants or business advisors.
To secure that investment, Brown says growing businesses need to show that their management team is committed and capable and have a sound understanding of their sector, including who is the competition. They must know their own strengths and weaknesses, hold intellectual property and have barriers to entry in place. There must be a clear operational and financial growth trajectory.
“The benefits of private equity are in the funding and expertise to drive value and growth. A strong private equity partner should open up a range of growth and exit opportunities,” adds Brown. “But there are also challenges. They start in the very specific way your business needs to be understood and presented to resonate with the PE community. This and ongoing congruence in goals can be disruptive.”
Walker acknowledges the extra focus and management time needed following its investment but is relishing the change. “Our board meetings are more effective, and we are finding that managerial applicants are of a higher calibre,” she says. “We are growing up as a company and looking to increased brand visibility, innovation and distribution. Our momentum and morale are back.”
Please note that this is unlikely to be the first option for raising finance as there will be conditions attached to any agreement reached, which by their nature will be more onerous than those imposed by a mainstream lender.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.