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What makes a stand out investment?

For Key Capital Partners, the key to a good investment is growth potential. Identifying and improving value drivers in a business is fundamental to the success of an investment, as too is choosing the right exit option at the right time.

But how is this done in practice?

At the outset our aim is to look for businesses with some, or all of, the following attributes 1) attractive products or services ideally with a recurring revenue base, 2) serving expanding markets and 3) an ambitious and committed management team.

Once we’ve found the right business to back, the structure of the deal we put together is an important first step. We have two objectives here. Firstly, we want to align the interests of management and shareholders such that everyone is pulling towards the same objective. Secondly, we want to ensure that the Company has sufficient cash available to fund its growth. This could be cash to finance sales growth and the consequent increase in working capital required or it could mean an injection of cash into the business to fund expansion of production facilities, new premises or an increased workforce. We limit the amount of bank debt we use in our structures. We want management to be focussed on growth, not bank repayments.

The structure of the management team is the next key ingredient. As a business expands the management team needs to grow to ensure there is adequate skill, segregation of duties and a balance of perspectives. We have a successful track record of helping Managing Directors and Founders find senior executives with the complimentary skills required to round out the management team. Attracting the right calibre of management is vital. We include option schemes and other incentive plans in our financial structures to ensure that we are able to reward incoming management in line with the goals of the broader business.

Once those stepping stones are in place, we can all can focus our attention on the business strategy and achieving the growth ambitions it set out to do initially. Organic growth such as expanding into new geographies, launching new products, a new website or operating system could be the objective. Alternatively acquisitive growth is another way to add value, where established businesses are bought to ‘bolt-on’ additional revenues and profits to the acquiring business. We have identified, approached and acquired bolt-on acquisitions for many of our portfolio Companies; putting our research skills and M&A experience directly to work for the benefit of our portfolio and adding significant value to them.

More important than all these areas though is the partnership we build with the management team. We see ourselves as on the same “side” as management; keen to work with the team to develop, implement and refine the strategy. We understand that no business plan can be written in stone and are keen to work with management to ride out the challenges and exploit the opportunities that present themselves. Our objective is to bring our experience and contact base to bear to support the management team and maximise the value created over the course of the investment period. We purposefully have a small portfolio of companies that we invest in to ensure we are on hand and up to date with the issues faced by our management teams as often quick decisions are needed in fast moving businesses working in fast moving markets.

Finally, achieving the right value for the business on exit is clearly a vital step in determining whether an investment was ‘good’ or not, as that’s the time when the value growth is crystalised. However, the path to exit is a long one and should be considered well in advance of your ideal exit date.

Identifying key value drivers that a potential buyer will look for and eliminating value drags are key to a successful exit. Depending on the type of exit route you’re pursuing this may identify as a full and balanced management team that are still committed to future growth, or perhaps a solid recurring revenue stream or sound financial records to underpin the trading history. Getting these in place early will help maximise buyer interest. We have exited multiple businesses by trade sale, sold to financial buyers and floated businesses on the stock market and have real world experience of the attractions and pitfalls of each route.

Over the last 15 years we have worked hard to build a business and develop a culture around supporting and nurturing SME’s. We believe that we’ve succeeded, but don’t take our word for it. If you’re interested in taking on a supportive financial partner to accelerate the growth of your business please contact us and ask to speak to the people we’ve worked in the past – they’re our best advocates.

Posted in All , Blog on Jan 19, 2022