Private equity tagged posts

Private Equity – The Unique Growth Strategy

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Most businesses start small. It is the hope of the owners of these businesses that they will eventually grow to be big. In the world of business, it makes sense to start small. This is important at this stage because of limited resources which necessitates the minimization of operational and other expenses. The bigger the business, the harder it will be to keep tabs on expenses. Small businesses cannot afford to make major commitments which would entail large expenditure. There are many problems which are encountered by small businesses but which larger ones are immune from. Limited access to capital and better markets is one of the shortcomings of small businesses.

Private equity is the form of business financing whereby an investor puts in his money and becomes part owner and part lender. Many business owners going for private equity often have to forfeit their majority shareholding because the financier brings in large amounts of money as compared to that initially put in by the business founders. Private equity differs from borrowing from banks and other financial institutions. Those who give private equity end up as part owners of the business. However, part of the money may still be part of a repayable loan.

Many small businesses that previously acquired private equity are the big companies that can be seen today. They made use of the rare source of finance that private equity offers.

 

Most start-up companies do not make it beyond the first few months of operations. The passion possessed by the owners of these companies does not seem to enhance their success in any big way. What they need is bigger capital, more reliable markets, and better networks and expertise. These are some of the opportunities which are exploited by getting private equity. It is also useful in preparing a business for sale at a good profit.

Despite its unique advantages, private equity has some shortcomings. Business owners who attach importance to sentimental value are not favored by the model. Providers of private equity are only interested in the performance figures and not much else. It is also uncomfortable for many business founders who have to work as employees in the companies they started and answer to somebody else. Investors put in private equity so as to raise the value of the business and sell it. This is not good for those who want to keep the business for posterity.

If a business owner is considering private equity to boost his business, there are several factors to consider before taking the step. The first thing is assessing and deciding if this is the only way available to raise the capital required. Secondly, it is important to come to terms with the prospect of giving up control of the business. An owner who is not ready for the changes that a potential investor would demand for should not go for private equity. Finally, if the business is something one wants to retain in the family for long he should avoid private equity.

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venture capital vs private equity infographic

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Private Equity: How to be a Successful Fund Manager

The worldwide investment pool for private equity is $3 trillion. Of that amount, roughly $1 trillion is actively looking for investment opportunities. At last count, there were 6,117 companies looking to invest in any project that can return a profit. They are hotels, restaurants, distressed securities, junk bonds, hospitals, apartments and Chinese companies to name a few. The sums of money invested are huge and come from endowments, foundations, private and public investors, pension funds, service companies, family offices and investors who are authorized to act on the behalf of others.

Competition and performance are your keys to success.

First, let’s look at some of the skills you need as a fund manger:
Personal qualifications.
· You must be a super, sophisticated salesperson. You are the standard bearer for your firm. Even though you may hire a cadre of fund- raisers, ultimately the investor will want to meet you and “size you up” so to speak. If you are just starting out, the inevitable question from an investor is: “Why should I invest $3 million in your company when I can invest it in one of the top ten funds?’ Here you must rely on your past experiences. Most often fund managers have managed portfolios or were traders with a successful track record.

 

The Art of the Deal.
· Now you’ve raise the capital you need. The next step, and this is the nutcracker, what do you invest in? That one decision will make or break you. You may hire a small band of analysts who search and find the best deals. Ultimately, the final decision rests on you. If you lose money you will be sacrificed on the altar of failure. If you make money you will be judged by how you rate compared to your peers. But that’s just the beginning. If you stop now you are finished. You’ve got to start the whole process all over again and set up a new and different fund.

 

On Site Managers.
· Many deals require specialists who will manage your property or investments. Here again, your savvy in picking the brightest and the best is crucial. Many deals start out winners, but unless they are closely monitored they can fall apart quickly. Remember if you buy a company hoping to improve the balance sheet, the investment must produce results otherwise you will lose your investors. These are unpredictable times and where you had hoped to resell the company in one or two years, it may not be possible to do so. Remember also, that this plan works best in a bull market. If the market turns sour, your company can start losing money and you’ll quickly find yourself out of business.

 

Back Office Personnel.
· You will need a staff of qualified accountants, lawyers and auditors who will translate your activities in clear, concise, readable formats.
· You will also need personnel who will communicate your results to your investors via website, email, and financial summaries.

 

Compensation.
· Generally, there are two main types of fund manager compensation. One is to receive 2 to 2.5% of committed capital. The other is to take a cut of profits (carried interest) that normally is 20%. This can taken yearly or deferred, depending on how the deal is structured.

 

Some closing comments. 
· Being a fund manger can be a lonely job. Unlike listed companies that are continuously evaluated against one another, you have no such guidelines. You are often a one-a-kind enterprise.
· You must always be looking forward to your next fund while keeping your present one afloat.
· There is no time off. You can’t just say: I’m going to wait until next year.” That’s a sure sign you are going out of business.

Continue reading latest main stories of private equity issues from the David Hand Crescent Point Asia and Crescent Point Private Equity info site, the robust emerging markets investment management and financial advisory firm primarily targeting in the Asia-Pacific and Middle East regions.

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