What is minority capital and is it right for your business?

Equity capital is the funding provided in exchange for selling a share in your business. BGF, one of the UK and Ireland’s most active investors, explains more.

If you are considering seeking equity capital, it is worth weighing up which type of investor you want, as the relationship you will have with your investor is likely to be quite different in either case.

Here’s how to decide whether minority capital is right for your business.

Minority capital means a non-controlling investor

Minority equity investors generally do not have the final say on important decisions. In investing parlance, they are non-controlling. In contrast, a majority investor is usually the controlling shareholder. That means they may be able to overrule the company’s founders or management team if there is a disagreement about what is the best course for the business.

The precise relationship with your investor will be shaped by the terms of your contract, which you should always read carefully, taking specialist advice if needed.

When seeking equity funding, it is a good idea to consider what kind of relationship you want. Both types of investors have an incentive to see your business succeed, but it’s inevitable that a relationship with a controlling shareholder will feel different to a relationship with a non-controlling one.

Minority capital gives you more control over exits

To help decide whether minority capital is most appropriate for you, you may want to consider the issues on which you and your investor might plausibly disagree, making sure to look at a range of scenarios – not only the “best case”.

As well as being a relationship, an investment is a journey that two (or more) parties take together. You may initially agree on the destination, but a lot can change in the lifetime of an investment. You should consider the possibility that things may not go to plan.

When seeking equity funding, it is a good idea to consider what kind of relationship you want. It’s inevitable that a relationship with a controlling shareholder will feel different to a relationship with a non-controlling one.

One issue that can potentially cause misalignment is the question of when and how the investor exits their investment. This can happen in a number of ways: you may agree to sell your business to another company in your sector; a private equity house may buy the business; or you may list your company on a stock exchange – this is called an initial public offering (IPO).

Businesses and investors sometimes fall out of alignment on the question of timing an exit. For example, an investor may wish to pursue an exit before the management team is ready. To resolve these disputes, majority investors often include so-called drag along rights in their contracts. Drag along rights essentially allow the investor to force an exit when they choose.

Investors of minority capital typically do not have recourse to drag along rights. Instead, the founders and management team are in control of the exit timeline.

Some minority investors describe themselves as providers of patient capital, indicating that they are willing to provide investment that is long-term in nature. Patient capital allows a business to choose the exit timeline that works for them, which could be anything from 12 months to many years.

The market for minority capital

The private equity industry has historically favoured majority investment deals. There is some evidence that private equity firms are today making greater use of minority capital and non-controlling investments than in the past. Some of the drivers of this trend are thought to be greater competition for deals, which is pushing firms to explore co-investments when previously they would want to be the sole investor.

However, majority investments are likely to remain the norm for most private equity houses. One of the reasons for this is that private equity firms are typically committed to providing returns to their limited partners (LPs) at set intervals, such as after a three-year investment period. Insisting on majority investments with drag along rights allows them to realise the value of their portfolio at a time that suits them.

Minority investors and syndicates

Non-controlling minority investors are often willing to invest alongside other minority investors. Having a larger pool of investors can increase the amount of support and expertise available to you.

Is minority capital right for you?

A minority investment may be a suitable choice for your business if:

  • You want a non-controlling investment partner, who will work alongside the management team and shareholders but not overrule them.
  • You want to retain control over important decisions, such as when and how to pursue an investment exit.
  • You do not want your investor to have drag along rights.
  • You want funding that is long-term in nature.
  • You are considering receiving capital from more than one investor while retaining ultimate control of your business.
  • You want support and guidance from an investor, but ultimately you want the founders or the management team to steer the business.

This article originally appeared on the BGF’s Insights hub.

About BGF

BGF was set up in 2011 and has invested over £2.5bn in more than 400 companies, making it the most active growth capital investor in the UK. BGF is a minority, non-controlling equity partner with a patient outlook on investments, based on shared long-term goals with the management teams it backs.

BGF invests in growing businesses in the UK and Ireland through its network of 16 offices.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of NatWest Group, as of this date and are subject to change without notice. Copyright © NatWest Group. All rights reserved.

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