Majority or minority stake: Does it really matter?
Business owners are sometimes concerned about ‘losing control’ when raising private equity (PE). This fear typically manifests itself in the question to the investor of ‘do you need to take a majority stake?’ But what does control really mean and does it actually matter?
The answer to this ‘majority or minority question’ is often just the result of some simple mathematics linked to the transaction parameters. Irrespective of what stake the private equity investor holds, they will typically require legal provisions to protect their downside in investment threatening scenarios; it’s just the market reality of raising institutional investment. It certainly doesn’t represent what a business owner might view as the loss of day-to-day control.
The majority or minority question is perhaps the wrong one to pose. Arguably more pertinent is ‘How does your investment style fit with my likely needs?'
Jeremy Morgan, Investment Team
PE investors are not operators. They don’t want, or indeed have the time or skillset, to run a business on a daily basis. Their job is to find and back talented management teams in interesting markets, supporting them to grow the business and enhance value.
The majority or minority question is therefore perhaps the wrong one to pose. Arguably more pertinent is ‘How does your investment style fit with my likely needs?’.
The PE sector comprises a staggering number of operators offering varied expertise, methodologies and cultures. Working out what relationship you want with your investor together with the support you would like, are vital filters to add to the requisite economic goals. Many of these relevant investment skills can be identifiable via past successes that should be referenceable. Typical examples may be support to source and make acquisitions, digital transformation, talent enhancement and internationalisation.
In addition to these ‘hard’ benefits, at Sovereign our experience is that PE investment is optimal when a genuine partnership is formed between stakeholders. Ideally this should not just mean strategic and economic alignment, but mutual respect and a desire to collaboratively embrace the respective skillsets around the table.
I would therefore contend that the majority or minority question is much less important than finding the right investor. This works both ways of course. Whilst at Sovereign we are ambivalent to minority and majority stakes, our desire for a true partnership approach is a necessity for all the businesses that we partner with.