Research by regional mid-market private equity firm YFM Equity Partners (YFM) has revealed a growing focus on culture and working practices, rather than simply valuation, after almost a year of interrupted working and repeated lockdowns.
The survey polled over 120 entrepreneurs, advisers and dealmakers across the UK in December, and showed that the primary consideration for boards looking for VC and growth funding was the investors’ approach to working (48 per cent), closely followed by their cultural fit with investors (45 per cent), whilst the financial terms, once the dominant consideration, came in as the third most important criteria, only selected by 38 per cent of respondents.
David Hall, investment partner at YFM and managing director, says: “It is clear that entrepreneurs have different priorities after the experience of the pandemic, and the impact it has had on their organisations, their people and their own quality of life.
“Our survey suggests that management teams are now placing more value on their long-term organisational health and bringing on board a supportive partner. That doesn’t mean that VCs can get better value for money, but rather they have to demonstrate the right approach and ethical standards as a prerequisite before they get through the door of the best growth businesses,” he added.
The survey polled the founders and boards of high growth SMEs across the UK, as well as leading dealmakers in the £2m-£15m market, the specialism for YFM that has investments in dozens of portfolio businesses. Respondents were spread across sectors including software technology, medical devices, business services, food and drink, retail goods, e-commerce and manufacturing as well as professional services.
Hall continues: “The findings came as no surprise from our own experience of 2020, and the investments we have made since the first lockdown last March. We work closely on the boards of our 40 or so investments, and after the immediate work to insulate businesses from the effects of lockdown, there has been a huge focus on supporting management teams, helping their people to adapt to a new normal in work and home life, as well as advising them on financial decisions.”
Fifty-eight per cent of those surveyed believed that the worst of the impact of Covid-19 for UK business was still ahead, with 15 per cent unsure and only 27 per cent believing the toughest times were behind the country.
Despite the relative uncertainty, over 57 per cent of the entrepreneurs and investors surveyed planned to increase investment in 2021, with just 8 per cent planning to reduce it, and the remaining 35 per cent unsure about 2021 investment levels. Interestingly, ESG or sustainable investing had also moved further up the agenda with 68 per cent of respondents highlighting it as being an ‘important’ factor when sizing up a potential investor. A theme YFM will return to this year.
Hall says: “There is obviously optimism to invest despite the widely held view that we haven’t necessarily turned the corner with regards to the impact of COVID on business. But it does seem that the hardships and disruption to business have caused a real, long term re-evaluation of priorities by founders and investors, and that’s got to be a rare positive that has come from all the negatives of 2020.”