Finding Distressed and Turnaround Equity Investors

When a business needs turnaround equity it will generally need to act quickly to secure this which means needing to be able to speak to potential funders who understand this area and its risk and limitations and who are prepared to move swiftly enough to make a deal work. This article covers what distressed equity investors exist in the UK and how to obtain turnaround investment.

CLICK HERE to see our short video briefing on raising turnaround equity.

Request your FREE 13 Key Steps Turnaround Guide and monthly newsletter here.

Just complete the form or:

CLICK HERE

With turnaround equity as with any other area, potential investors break down into a number of categories:

Business angels

Business angels are individual investors (think Dragons Den) who have their own funds to invest in business proposals. In practice since business angels are investing their own hard earned cash and don’t have to do so unless they decide to write the cheque, getting to completion with an angel is a notoriously uncertain process.

While individual angels obviously vary enormously in their interests, ability to provide funding, appetite for risk, sector interests and so on, as some rules of thumb business angels are the usual source of equity funding for requirements up to say £250,000 or even £500,000.

Since it is their own money, angels will usually want to have a fairly active involvement in the business and its affairs and this is even more so where the case is some form of a turnaround situation. Think of a business angel as being as much a new partner in the business as being a source of finance and you will be getting close to the relationship you could expect. So you will need to ask yourself, is this a partner I will want to, or even be able to, work with going forwards.

Trade investors

They are often overlooked but other businesses in your industry, sector, or sometimes even supply chain, may have both money and an appetite for investing in your situation. Indeed while debt for equity swaps between customers and their suppliers are not exactly common, we are seeing more of them that we used to in business restructurings.

As with a business angel, a trade investor may not be an investment professional, which is to say that making investments is not their core activity and so getting to completion may be tricky.

You will also need to carefully consider the commercial implications of any such investment and in particular, how this may affect your ability to trade with other parties, whether suppliers or customers, who are in competition with your new investor.

Venture Capitalists / Private Equity

Sources of institutional investment into businesses in the UK have generally been referred to as venture capital while in the US the term venture capital tends to be used to refer to firms that provide funding for start ups and early stage businesses (think Silicone Valley), whilst private equity is used to describe the firms providing funding for large leveraged buyouts (think RJB Nabisco and Barbarians at the Gates).

While there is no firm distinction, it can be useful to categorise venture capitalist in to either:

financial investors, where they are essentially simply providing the finance for the business and its management team; or
owners who will seek to be actively involved in the management of the business, usually by proxy in the form of controlling the appointment of the business’s directors (who will usually have options or some other arrangement giving them an incentive to drive up the capital value of the company). In some cases these VC firms are starting to look a bit more like small conglomerates than finance firms.

As you might expect, in distressed equity situations the VCs interested will tend towards the ownership model and will generally want to involve experienced professionals to manage the turnaround.

Private venture capital firms tend to be interested in larger transactions than business angels and some cases can fall into the ‘equity gap’, being too large for business angels, but too small for VC houses.

In some regions, much apparent venture capital, particularly at the smaller end, is in practice quasi public funding which has been channelled to VC houses to manage. Specialist consultants exist who can conduct searches to identify these sources of funding.

As professional investors, while the screening and negotiation process will be rigorous, such funders are set up to put money out to work so providing a deal makes sense, there is less danger of it falling away before completion for unforeseen or emotional reasons than with individual investors.

Sourcing distressed equity or turnaround equity investors

Business angels are usually best reached through local or national networks and there is certainly one national network who’s members specialise in turnaround situations. The trade association for these networks is the British Business Angels Association and there is more information on their website at www.bbaa.org.uk.

Identifying potential trade investors is normally a matter of knowing your industry sector and key contacts although corporate finance advisors such as accountants may also be able to help.

Identifying venture capitalist turnaround equity investors can be more difficult but there are services being offered which can help the process. One resource for example is a panel approach which provides a confidential and ‘free to user’ matching service putting funding requests in front of over a hundred such funders interested in distressed equity who are in a position to relatively swiftly complete deals in the range £1m to £30m deal size.