As a growth equity investor, minority positions are more the rule than an exception, so we are prepared to work with companies to create investment structures that fit best with their objectives. In fact, we see minority investments as potentially more advantageous than control stakes for the following reasons:
- Better investments: Companies selling minority stakes often have more attractive growth prospects, specific expansion plans, and clear roadmaps for investing the capital raised
- Confidentiality and reduced execution risk: Sellers often don’t want to publicize their desire to attract a third-party partner and sell a minority stake, fearing adverse publicity and customer fallout if the transaction fails. Unlike the vast majority of control deals, minority deals are typically not consummated through formal auctions.
- Competitive advantage for patient capital: Minority stakes usually provide early participation in the growth of companies, and allows us to build relationships with owners rather than simply participating in a public auction. Investing in building relationships with family owners and senior managers takes time and effort, but we have learned that all the calls, meetings, and industry conferences eventually pays off.
We do consider a variety of factors and take certain steps when making minority investments:
- When they work: Minority ownership interests can work well when the key means of value creation are related to top-line growth and governance. These include facilitating organic or inorganic cross-border growth, professionalizing management teams and processes, enhancing governance, and consolidating fragmented sectors.
- When they don’t: Minority investing can become problematic, however, when the investment thesis hinges on activities such as creating value through restructuring, improving operational performance, cost cutting, and supply chain initiatives. In these instances, majority ownership and a hands-on, control-oriented approach are often more appropriate.