How a private equity investor can help owner managed businesses with more than just money, discovers George Adams, 3i Director.

If an owner managed business is considering looking for finance, there is often a bewildering array of choice and the nature of the finance is just as important as the terms on which this is being offered.

Although many businesses turn to traditional sources of finance like family, friends or their local banks, there are a number of downfalls in doing so. If a friend or family member gets involved there can often be conditions attached and emotional pressure on how to use the money or conflicts can be created.

Increased borrowings from a local bank may be another source, but this may also result in too high a level of gearing, it may make the business more susceptible in any downturn in trading or add potential financial risk.

It is in just such situations where a business may find that finance from a private equity provider may be a more robust route for funding.

This is where 3i can help. We are interested in a clear alignment of interests between us and the business.

We aim to provide committed, long term equity to the business and its shareholders.

Whereas bank funding may feel appropriate when times look good, their focus will inevitably shift to one of protection of their own position when the going gets tough.

Good examples of where 3i has successfully invested alongside local companies are the Cosham based Leafield group, Apex Computers International based in Gloucestershire and the 2001 MBO by the Early Learning Centre from John Menzies plc. All three companies have gone on to develop individually and be extremely successful under their new ownership.

So how does it work?

A private equity backer will typically take a minority shareholding in return for providing committed risk investment for the company.

The size of this equity stake is dependent on the level of funding required, the value placed on the business 'today' and the potential value that can be created in the future. This, in turn, will be linked to the current and forecast earnings of the business.

A discount may be applied to reflect both the non-controlling position and the unquoted nature of the investment being made.

Typically a private equity company would be involved with the company for up to 7 years and would take a shareholding up to 50%, but usually in the range of 25-40%.

At 3i we have an independent director's network of some 600 people, which enables us to find an experienced professional from a sector to work with a company.

At 3i we invest off our own balance sheet, so we don't have the pressure of trying to invest a fund's money.

As a result we have deep pockets and can often invest in more than one round of finance.

As mentioned above, we will also come up with a financial solution to suit your company's own requirements.

Our investment will typically be structured in a way that our yield is linked to the growth of the business, which means that we can receive the same return with a longer exit horizon.

www.3i.com