Private equity investors are increasingly seeking out deals that offer them a high regular income rather than the promise of a big exit, it has been claimed.
According to private investor network Hotbed, the recession is driving an increasing number of entrepreneurs and investors towards private equity deals, as low interest rates on savings prompt investors to look elsewhere, while the scarcity and expense of debt funding is driving entrepreneurs towards equity finance.
However, Hotbed has noticed a “role reversal” in private equity deals, where the prospect of a large capital exit is no longer the main driver. An increasing number of deals are being structured as part equity, part loan notes, which give investors a return on their investment before they exit via interest payments.
For instance, in the recent management buy-in of haircare manufacturer Sabel Cosmetics, the main component of the investment offered loan notes, secured on the assets of the company, with a 9% annual yield, Hotbed said.
Gary Robins, chief executive of Hotbed, commented: “Private equity is helping private investors to enjoy relatively secure high yielding returns in a way which helps established businesses to secure funding in a difficult banking climate.”
Robins said the recession has made business owners more willing to accept lower valuations for their businesses and different types of investment structures.
He said: “Mature, profitable businesses are now available at far lower multiples of earnings than previously and are likely to rise in value considerably once confidence returns and the economy begins to recover.
“This means that private investors have a rare chance to secure a regular income on top of the strong likelihood of achieving the types of returns generally only seen on higher risk investments such as start-up companies.”
Bill Morrow, founder of Angels’ Den, has also noticed a growing trend of private investors wanting a regular income from the company they’re investing in and eager to use their experience to drive the business forwards.
He told Growing Business: “We’re seeing two big trends: one is that angels are becoming much more active investors; the second is people buying themselves jobs – for example: here’s £200,000, and I want you to pay me £50,000 a year to do your bookkeeping, or to be your salesperson.”
© Crimson Business Ltd. 2009