Minority investing isn’t new, but its popularity is. Despite private equity’s rise since the 1980s, minority investing has been a small part of it. It may have been because investors were seduced by the leverage effect of buyout funds, or because the nuances of this specialist investment mean it requires a very particular skill set (and often dedicated fund) to ensure success.
Minority investing as a proportion of private equity is growing. When I joined Inflexion in 2013, just around 5% of Emea PE (sponsored M&A) deal value was minority. The success stories over the past decade helped to boost awareness and we have noticed a real uptick in interest in the last year: 38 transactions worth $37bn took place in the first half of 2021, roughly the same amount as the whole of 2020. This brings it to 18% of total PE value, its largest percentage ever.
This growth isn’t because of a growing pool of opportunity – the UK and Europe have long been rife with investable businesses. The growth is more likely the release of pent-up demand as more investors embrace this style of investing, and owner-managers increasingly realise that there are attractive alternatives to selling their business they’ve nurtured into success. As more of these take place, the awareness and attraction grow.
Looking to the future
These owners may want to release some liquidity but retain control of their business as they devise a long-term succession plan. They may be looking to the future, whether for personal reasons or professional, including pre-IPO funding, M&A or super-charging their growth, possibly by entering new regions or markets. It can maximise the chance of the founder’s legacy remaining intact rather than being absorbed by another business. Minority funding allows owners to maximise the value of their business while de-risking their personal finances – all while retaining control and gaining flexible funding and support for growth.
In addition to these benefits, the increase in minority investment is now also being driven by Corporates and PLCs, which may bring in minority co-investment to support their own conviction in the long-term independent prospects of a subsidiary or division within their business as valuations rise. We’ve done this a handful of times in the last year, including our carve out of DWS from Daisy Group in 2021 which saw the majority of the shareholders of Daisy reinvesting directly into DWS as an independent entity.
We also partnered with FTSE 100 Informa to bring together two complementary businesses to create Curinos. Private equity funds are also increasingly considering bringing in a minority investor enabling them to realise some value while running their winners for longer. Inflexion Partnership Capital invested into Marston just over two years ago, enabling ICG to do precisely that.
Done properly, minority investment can maximise value of the business on an eventual sale if that is what the original shareholders want to do. This was illustrated twice last year: Huws Gray was transformed with a doubling of the builders merchants’ footprint and a more than doubling of headcount during the three-year minority partnership. This was achieved through thoughtful acquisitions, including a transformational one within the first six months.
Vet chain Medivet is a similar success. It grew from around 150 sites mostly in the south of the UK when they partnered with Inflexion in December 2016, to about 300 in the UK and 40 in Spain and 20 in Germany when the business was sold to CVC Capital Partners in September 2021 when the majority of the founder veterinary shareholders decided to sell and retire.
Both businesses took on minority capital and drew on our experience in M&A and digital enhancement to drive growth.
Minority investments are not all created equally, and this is vitally important for the owners selecting a partner. It requires careful consideration to ensure the backer is the right fit for your growth plans (and personality!) as it is typically a long-term partnership – “renting out a room rather than selling your house”.
However, it’s important to look beyond just the chemistry and growth experience the backer can bring – what about the minority investor rights? This fine print may be overlooked but is critical in ensuring it’s not a control deal masquerading as minority. It’s often the case that majority funds dabbling in minority must secure certain rights to protect their investment and LPs, given those LPs have signed up to a buyout fund. This situation – which could account for a large proportion of so-called minority deals – can mean leadership teams don’t retain control and thus there isn’t the same need for the investor to build trust and consensus as they can force a sale or make other changes.
Growth and consensus
True minority investing works by being aligned for growth and working hard for consensus. This often includes agreeing upfront ways to resolve issues. One key part is how to bring the partnership eventually to a natural end, allowing all parties to have the freedom to choose their next journey and be treated fairly without the need to necessarily sell the business. For this reason, a fund dedicated to true minority investing, which has extensive experience and references in working in such partnerships from start to finish is usually the best bet for a company looking for a partner to support growth.
David Whileman is a partner at London-based PE firm Inflexion who leads the firm’s specialist minority investment Partnership Capital Fund.