Private Equity: Building businesses in challenging times

By Malcolm Coffin, below, Partner, Inflexion Private Equity Partners

The last few years haven’t been easy. The agility adopted by successful leaders and companies during the pandemic put them in good stead but this has swiftly been tested yet again with a host of new challenges, not least a cost-of-living crisis and inflation causing business plans to be cast into doubt as consumers and businesses alike curtail spend.

In spite of these ongoing difficulties, we are seeing resilient businesses not just surviving but thriving. Many of them are backed by private equity, with the hands-on support offered by well-resourced investors becoming even more relevant when markets are challenging. The benefits of this strategic clarity and having partners around the table aligned on success and how best to achieve that together can give management teams the confidence to continue to attack the market rather than retrench and batten down the hatches. The 50+ companies in Inflexion’s current portfolio for example have grown both revenues and profits by over 20% on average in the last 12 months despite the parlous economic backdrop.

You can see this willingness to take on the market opportunities across a number of different fronts. For example digital enhancement can help drive market reach or lower costs to acquire and serve customers, with Inflexion backed Lintbells an example. The pet nutrition supplement business invested in performance marketing with heightened spend across its multi-channel digital platform. Within two months, Lintbells saw an uplift of 43% in new weekly new customers.

International expansion is another way private equity firms can help businesses. Influencer agency GOAT for example has focused on expanding its reach internationally, with North American a core focus over the last two years. The firm was sold to WPP in March after headcount more than doubled following its backing from Inflexion. Virgin Experience Days also broke into the sizeable US market by sourcing and negotiating an acquisition there with private equity backing, helping the business to more than double its revenues during the five-year partnership.

The active support an experienced private equity backer can bring helps to accelerate value, but stripping it back to its most simple level, private equity acts as secure capital when other sources are hard to come by or entrepreneurs are simply wary of banks and taking on debt. For example Upperton Pharma Solutions, a UK-based specialist contract development and manufacturing organisation, is in an exciting phase of growth, with equity funding secured in 2022 to deliver a new facility that will support a 10-fold increase in capacity as well as allowing the firm to significantly expand its service offering. The funding is also supporting Upperton’s plans for a near doubling of headcount as well as the purchase of new equipment to increase its ability to support customers further in the drug development process.

Whilst the challenges businesses are facing now can seem daunting, navigating market flux is nothing new for business owners. Even in these uncertain times, there’s one thing that we can be certain of and that strong businesses will continue to be active, continue to progress.

Reflecting on similar patches of uncertainty in the past, I go back to late 2008 when the world felt like it was falling apart post the collapse of Lehman Brothers. Yet in this period from 2009-11, Inflexion had the confidence to do 8 new platform investments, countless bolt-on investments alongside them. And you know what, these turned out to be some of the best investing vintages. More than a 4x realised return across those 8 post-GFC investments driven by exceptional management teams making the most of the field in front of them.

For those business owners who have the confidence to seek private equity investment despite the choppier challenging market conditions, the real focus should be on selecting the right partner to help you expand and maximise the opportunities created by the market dislocation. Chemistry is everything and selecting a partner with the right experience and outlook to help business owners achieve their growth ambitions.

For the private equity industry itself, there are also choppy waters to navigate. The institutional funds who invest in PE firms are more discerning now than ever, focusing their time and investment on those firms with a clear strategy, consistent deployment and track record of superior returns.

Malcolm Coffin is a Partner at Inflexion and leads its Enterprise Fund. Inflexion is a leading private equity firm investing £10-£400 million for minority or majority stakes in businesses across a variety of sectors. Each investment, regardless of size or stake, has full access to Inflexion’s value acceleration strategies, including M&A, international expansion, digital enhancement, ESG excellence, commercial effectiveness and talent management. Founded in 1999, Inflexion has £8 billion under management.