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. A majority investor is one who owns more than half of the shares in the business. Minority capital is the name given to the funding provided by a minority investor – one who owns less than half of a business.

If you are considering seeking equity capital, it is worth considering 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 investor 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 consider 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.

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 rights” in their contracts. Drag rights essentially allow the investor to force an exit when they choose.

Investors of minority capital typically do not have recourse to drag 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 after a three-year investment period. Insisting on majority investments with drag 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 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.

BGF: an investor of minority capital and nothing else

BGF was founded in 2011 to be a different kind of investor. We have invested in more than 400 businesses across the UK and Ireland – all of them minority, non-controlling investments. We are able to do this because of our long-term, “evergreen” funding model, which allows us to provide patient minority capital.

Our investment model is based on trust. We identify businesses with strong management teams and entrust them to make the right decisions, providing support and guidance when necessary. We do not impose drag rights. More than 100 BGF-backed businesses have achieved exits, on schedules decided by them, which have ranged from as little as 12 months to many years.

We operate from 14 offices across the UK and Ireland, making initial investments that are typically between £1-15 million, with the potential for significant follow-on funding. BGF’s offering is “different by design”, and we are the most active growth investor in the world in terms of investment volume, averaging about one investment a week.

If you’re interested in our offering of patient, minority capital that helps businesses achieve their growth targets, contact us today.

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.