Turnaround Equity Investors

Investors in turnaround equity have to both understand this area and its risks and limitations, and be 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.

With turnaround as with any other type of equity, potential investors can be divided 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 personal funds and the decsion is solely theirs, getting all the way through 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. You need to think of a business angel as being as much a new partner in the business as a source of finance. So you have to ask yourself, is this a partner I will want to, or even be able to, work with in the long term.

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 business angels, a trade investor may not be an investment professional, which is to say that making investments is not their core activity. So getting a deal all the way through 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 beginning to look a bit more like small industrial conglomerates than finance firms.

Unsurprisingly, VCs interested in turnaround situations will tend towards the ownership model and will normally 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 development funding which has been outsourced 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.