Here's what a private equity partner looks for in a growing business

But not all businesses and ideas have what it takes to make it through a looming consumer slowdown, a weak pound and uncertainty around post-Brexit trade deals.

The firm has weathered recessions and economic storms for more than 30 years and was behind the first City wine bar – the Pitcher and Piano in the 1980s. It has since has invested in retail and high street brands such as Propercorn, swimwear company Orlebar Brown, and jeweler Monica Vinader.

BI sat down with Libby Gibson, a partner at Piper, to talk about what she looks for in a business, where the hot sectors are and how Brexit is being factored into the investment decisions.

The Q&A has been edited for length and readability:

Ben Moshinsky: What do you look for in investment decisions? How much does slowdown in consumer spending play a role in decisions?

Libby Gibson: The most important thing is whether the idea satisfies a real need. The best ideas are when the entrepreneur has gone "why can’t I find X?" or "why has nobody done Y?" Also whether they have surrounded themselves with the right people.

There’s an element of whether the person wants to work with somebody to grow their business or are they a megalomaniac? You can have people that are incredibly passionate about an idea, but they’re so passionate they can’t see their idea needs modifying. They become obsessed. So you need people who have a broad understanding of what else needs to go with the idea.

You also need people who are hungry to make money. You do get some entrepreneurs who do it for the love, not the money. And clearly, we’re here to help the entrepreneurs fulfill their ambitions. But you need that drive, that absolute burning ambition to be successful. In terms of putting that into the context at the market, we are looking for secular growth markets that don’t have a huge amount of cyclicality in them.

BM: What areas do you look at?LG: We have certain sectors that we’re focused on where we see growth opportunities. We have eight sectors and we review them annually. If you take hospitality. It’s a market we’ve invested in lots with a lot of success. It’s where we started. But we recognise that it’s becoming a very competitive crowded market where getting space is difficult, where you’ve got national minimum wage, cost inflation and a lot of headwinds. So the lens through which we look at businesses in the hospitality industry is much more finely tuned.

Beauty and wellness are growing markets and there’s also some interesting digitisation going into those markets, and there’s the Instagram impact. In this arena, we’ve also got this ageing demographic, so there are two or three brands that have thought about this quite carefully.

There’s quite a shift going on in the boutique fitness space. Things have gone from big gyms and corporate membership to smaller class sizes. It’s much more about the social interaction and not just the results that you want.

Food and drink is another area. We’re very focused on healthier on one end but we recognise that consumers have credits and debits. We can see that there may be indulgence brands that work.

We’ve done a heat map of the supermarkets and all the different aisles and see where the value-add is. You’d be amazed at how much that takes away from your ambit.

The conclusions were that there are some categories where it’s hard to innovate successfully because the consumers are relatively uninterested in the aisle. So if you take tinned goods, people don’t go down there very often and it’s not a terribly emotional purchase. If we think a brand as being a product with a value beyond just a transactional value to the consumer, then that probably isn’t where you’ll find it.

I think everybody accepts the landscape is getting more challenging. We’re not overly worried about it but we are planning more carefully.

BM: When you see a business that has space to grow, what are the first things you do?

LG: We start with people because it’s all about the people. Often you’ll find the business has organically grown, but they only know what they know. What we find when businesses get to a certain tipping point in size, they need to hire experienced people who can step-change the way the business goes about what it’s doing.

For some entrepreneurs that can be quite uncomfortable. There’s usually a need for the business to upskill. On product, it’s generally around not trying to diversify too much too quickly, and the distraction that causes.

In terms of distribution, it’s usually about people trying to go international too broadly too quickly. In our experience, it’s far better to do one or two territories really well and in depth.

The other thing that businesses find hard is keeping the customer at the centre of what they do when they’re growing fast. As they reach a broader audience, it’s quite easy not to have that first-hand understanding of the customer. BM: Tech companies are hot. How do you see that sector? Is it a bubble?LG: We’re not tech investors, although we look at consumer businesses that have tech at the heart of them.

We’ve been around a long time, we traded through the dot-com era. But because of our experience in the direct to consumer channel, this newer model — in which businesses recruited customers by spending money on filling the funnel and were not profitable — didn’t feel sustainable to us. What we’re most focused on is the ability to maintain customers and their repeat purchasing patterns. Because otherwis, you’re just spending to acquire customers.

LG: The fundamental at heart is whether the product is better and different, that absolutely doesn’t change. What changes is the speed at which businesses get momentum. Recruitment and keeping people engaged has got harder.

If you go back 30 years you were in a job on average at least seven years, now it’s something like two years. That’s quite a change in terms of the cost of training people and keeping them motivated. Culture is incredibly important. Back then, retail was much more stick than carrot. Now it’s about purpose and belief. A millennial brand has to have a bigger purpose than just selling stuff. BM: How is Brexit uncertainty affecting decisions going forward?

LG: Everybody’s anticipating a consumer slowdown so we’d be mad not to be thinking about it. But we’re still thinking about markets with inherent growth and categories with real need. The slowdown means it might just take longer and it might be harder.

The majority of our portfolio brands have sterling denominated trade so Brexit will have less of an impact on them. In other businesses, where we source in dollars and euros but also have a significant percentage of sales overseas in these two currencies, this provides a good level of natural hedge.

I think everybody accepts the landscape is getting more challenging. We’re not overly worried about it but we are planning more carefully.

Here's what a private equity partner looks for in a growing business

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