Deals 2022: Farewell to ‘vulture capital’

Perceptions of venture capital have changed for the better over the years – and deservedly so. If we go back a couple of decades, there was probably deserved criticism around the heavy-handed approach of some private equity houses, resulting in the not so affectionate nickname of “vulture capital”. It was felt by many that such investors latched onto the assets of a firm in distress and ruled with an iron fist.

Eva Bidiuk/Shutterstock
Eva Bidiuk/Shutterstock

While that might have been the case with some investors in the 1980s, today’s reality is very different. Business in general is much more personal, and that’s certainly reflective of the private equity arena. Indeed, there are now so many equity options out there that if investors acted in such a domineering way there would be nobody for them to invest in. They are also well aware that business owners and management teams seek out referrals from previous investee companies before they choose who to take on board as an investor.

Some management teams or owners have been wary of private equity because they were concerned they would lose control, particularly with family businesses where there were fears their legacy would be tarnished. The worry was that a private equity investor would drive growth to the detriment of the customers and employees.

But it’s a misconception to think that private equity is only interested in opportunities to make a fast buck or quickly flip for a profit. Our experience couldn’t be further from the truth. Private equity takes a great deal of time to understand its prospective investee companies, to get to know the individuals, and to ensure that strategic goals are aligned. It’s about both parties finding a partnership that is based on a strong relationship, where management teams feel they are trusted to largely get on with running the business without asking for permission.

Lyn Calder

There are many considerations to take on board before deciding private equity is right for your business. First and foremost you need to buy into what can be achieved. There is a need to have a belief that there is real growth potential in your business and you can deliver that growth. While you may have hesitations about what will happen if growth isn’t delivered, or if, for example, there is a downturn in the market, private equity investors now tend to take a pragmatic approach. It’s in no-one’s interest for a management team not to be aligned and working in harmony with its investor.

What we’ve seen in Scotland is the north-east embraces private equity far more than the rest of the country. This is partly down to the differing natures of the country’s markets. Historically, Aberdeen has grown at a rapid rate, with the oil and gas industry largely performing well in the last 20 years. It didn’t feel such a big ask for the investee’s management team to support a business plan with big growth projections as that was happening already. But you never had that exponential growth in the rest of Scotland, which has meant many business owners felt they couldn’t commit to delivering on ambitious targets. In the north-east, venture capital became part of the culture of how you fund businesses.

However, that geographical differentiation is gradually being eroded and the Central Belt is becoming more welcoming to venture capital.

This is partly because more private equity houses now are patient investors with no need to exit within a set time frame. The the Business Growth Fund (BGF) is more patient partly because of how it is structured. A lot of family offices have the same ethos. This can be because they made their money in a deal or in other family business activities and decided to invest it back into other businesses.

For various reasons, the myths around private equity are being scotched and it is becoming a more popular route for many businesses and is a much more common alternative to a trade sale – not least because it can give the up-and-coming management team an opportunity to get involved in ownership. Where the management team is crucial to the ongoing value of the business it can be the most logical option.

Indeed, younger management teams and owners can also be more receptive to private equity as they have not lived through the myths. They also realise they won’t achieve the growth they want organically in the short-team at least, so private equity can speed up the process.

For a variety of reasons, private equity is becoming a more popular option for firms looking to grow across Scotland and, as myths fade away, we see this trend set to continue.

Lyn Calder is managing partner Edinburgh and head of deals Central Belt at AAB