Private equity and minority investments: a worthy exception to the rule?
By James Goold and Jonny Bethell
Private equity investors have traditionally shied away from investment structures that give them less than majority control of investee companies. At the top of the market in 2007, it is estimated that less than 10 per cent by value of private equity deals took the form of minority investments. Of those, a significant proportion were investments by the likes of 3i, which has historically included minority investments as part of its mainstream investment activities. A limited number of other investors, such as ICG, make minority investments as a matter of course. Generally, though, the concept of minority investing has been anathema to the private equity industry and has remained the domain of the venture capitalists.
While lack of structural control is perhaps the main reason for this, the unfamiliar balance of power that comes with being a minority investor, and its impact on an investor’s negotiating position both at the outset and during the life of an investment, can also be a deterrent; the relationship with management needs handling differently. Departing from the mainstream buyout model can also be at odds with the investment philosophy on which a sponsor has been mandated by its limited partners.
Is this traditional stance changing, though, and are private equity houses having to look more favourably on alternative investment structures such as minority stakes? It would appear they are. The effects of the economic crisis have been felt by both private equity investors and entrepreneurs looking for private funding. This article looks at the dynamics within the private equity industry that are encouraging minority investments and some of the pitfalls and advantages they involve…
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