Investment Articles

The source of funding of any project has great importance. This is so as no business deal or venture is possible without finance. Private equity investments are one such source of finance. These funds have assumed great importance and statistics prove that private sources finance new ventures at a gigantic rate, that is almost 25 times more than finances from other sources. Thus private finance givers have turned into excellent investors for new projects.

Private equity investors are investors who have a high net worth and asset value and have liquid cash available. These investors are the back bone of private equity investments. Last year 300,000 firms and enterprises were launched in the USA and nearly one seventh of this lot was financed by these equity investments.

Private equity investors have made a mark in the financial field and they have had a tremendous impact in the entrepreneurial market. It is estimated that that these investors fund anything in a range from $20 – $60 billion annually.

Private investors with money to spare generally keep their money and investments in non-public companies. Thus a equity investor will most likely make an investment for 3 to 7 years, in contrast to venture capitalists who invest in companies at the inception stage or launch and also for much shorter periods

Private equity firms will follow some parameters while making an investment,that will include a strong management team and the company’s ability to bring in profit. They will also look at the growth potential of the company and whether an investor’s capital is safe as well as good return on his capital.He will also look at the exit clauses in case the equity investor wants to get his investment out.

Thus Private equity is never in loss making companies. Private investors are there to get a good return on the money they have invested and as such they will track the profit graph of any company they invest in. The private equity investor will look for agreements that give him a share of the profit generated at the time of exit. This will be an important clause for him as he can use the profit to invest in some other company.

From 2007 onwards the private equity financiers did take a nose dive as the economic scenario had become bleak,but at the turn of the present year the investors are back and have funds to spare as recession is on the way out.

For a startup company, Angel Investors can be considered the entrepreneur’s best friend, their saving grace, their answer to a prayer. Some say they are called “angels” because they are an answer to the entrepreneur’s prayer for money to get their business launched, or to respond to accelerated growth, or to bridge the capital divide and reach profitability.

Angels are the financial fuel of the economy. Before Venture Capitalists get involved, before banks will loan a company an unsecured note; Angel Investors provide the capital that fuels the entrepreneurial spirit and helps inventions become products and ideas become reality. I like to refer to them as Compassionate Capitalists. “Compassionate” because they have figured out that even though they can lose all their money, by providing investment capital to an entrepreneur with passion and purpose to see his or her company succeed, they are providing a hand up, not a hand out, that will fuel the economy by creating jobs and potentially whole markets by bringing innovation to the market. “Capitalists” because they aren’t donating to a charity, they are investing in a risky venture that banks won’t loan to and venture capitalist won’t even look at, with the intent of creating a big return on their investment. High net worth men and women become angel investors to create great wealth, never with the intent to lose money.

Angels are wealthy individuals who provide seed capital and growth capital to companies in the startup and early stage of their company’s life cycle. Their capital can be offered in exchange for equity in the company or as some specialized form of debt facility. Investing in this stage of company is the most risky, but it can also be the most rewarding. Rewards come not just from the financial returns, but also from experiencing the purest form of capitalism…bringing value to the market by supplying a product or service to satisfy a market demand. There is a definite sense of pride and accomplishment from being able to say you were an early investor in a block buster like MicroSoft or Starbucks, and surprisingly, there is little regret from the early stage investors in the near misses like WebVAN and PETS.com because they got their sizeable returns when those companies went public. It was the investors that followed the advice of their stock broker or financial planner to invest when those companies when public that saw a decline in the value of their investment because they bought at “retail” hoping that the value would increase over time. Angel investors buy stock when the company is still private, and reap their rewards with the company then sells that stock to another buyer or to the public stock market. They learned early in life that profit is made when buying at wholesale and selling at retail. That is how it works for the wise angel investor.

Investing or buying Private Equity of early stage companies is one of the secrets the wealthy use to create more wealth. As Robert Kiyosaki wrote in his best seller book, Rich Dad’s Retire Young, Retire Rich on page 127:

“the rich invest in shares of a company when the company is still a private company”.

To become a successful angel investor, it is important that individuals learn how to identify and screen opportunities for early stage private equity investing. In the eBook Series “How to Be an Angel Investor”, investors are taught how to take what they know from investing in public stocks and real estate and apply to making investment decisions about private equity investments. There are a couple of key points from the 5 volume eBook “How to Be an Angel Investor” that beginning angel investors should keep in mind:

1. Make sure you have a variety of investments to choose from. If you only have deals coming from your accountant or the guy you met at a cocktail party, you need to expand your horizons to get better quality deal flow and not be afraid to invest outside of your geography. Join an angel investor group or plan to attend events where multiple pre-screened companies will be presenting for at least 9 minutes. An investor cannot be expected to determine the validity of a business from a 90 second spiel as promoted in the fast pitch events that have become so trendy of late. The situation to avoid is having a desire to be an angel investor or “silent partner” in a deal, so you put money in to a deal that seems OK but in reality it isn’t a good deal. The investor doesn’t know this because he or she hasn’t been exposed to anything better. You buy the bruised apple because it is the only one on the shelf.

2. Make sure there are other investors participating. It’s OK to be the first investor in a deal if you know they have other investors pending, on the fence ready to join in along with you, or you have a group of investors that co-invest together. If you are the first investor in a deal, and you are investing an amount significantly greater than the minimum investment or the full amount to get them to their next milestone that will increase their value, you can sometimes negotiate more favorable terms for yourself. The situation you want to avoid is loving a deal or the entrepreneurs behind it so you throw your money away because no one else invests and it was an insufficient amount of money to get the company to the next level when they would attract other investors or begin to generate revenue.

3. Don’t get hung up on percentages of ownership. The price paid for the stock and the number of shares held is more important than the % of ownership you have because the % will change over time through multiple rounds of financing. Owning 100,000 shares at 50 cents a piece won’t matter if it is 1% or 30% of the company if the company has a reasonable plan to grow their value of the company so that it can be sold for $5 a share, as an example. A $50,000 investment will return to you $450,000. Often a company’s amount of issued and authorized stock will change over time as the company raises capital and the % will go down, but the amount of shares will remain the same and the focus should be on the strike price of the stock at the next interval of financing.

4. Ensure there is a solid barrier to entry from the competition. The barrier to entry comes in many different flavors. Most often it is in the form of a patent and most novice angel investors focus on having a patent. Patents are good but they aren’t the Holy Grail. If a big company, or a foreign company, chooses to violate the patent instead of buying the company, you can hang it up because the court costs alone will put the early stage company out of business. Patents do not prevent clever inventors of figuring out a better way to do the same thing or even just a different way to do the same thing. The filed patent gave them the idea, yet doesn’t keep them from bringing a similar product to market. Trade Secrets can be a great way to go for many products: software, food formulas, processes and so on. If that is the way the company is going, then you must ensure they have done the necessary steps to actually establish it as a trade secret…aka the formula for Coke. Other barriers to entry can be the management team, strategic partnerships, time lag on being first to market, and product pipeline.

5. Be clear on how the ROI will be achieved. When you look at your asset portfolio to see how alternative investments like private equity investment fits in, you can seek ways to “flip your money”, get a steady income, or hold for a big return years down the road. Your investment decision may vary over time depending on the rest of your portfolio and the situation with the company. A “flip” would be a short term note secured with a contract or order, a convertible debenture that gives you the option to collect the $$ or convert to stock, or bridge financing to a larger investment. Steady income may come if you provide royalty financing, investing to receive a % of the revenues until a fixed amount is paid back or investing in an LLC that pays you cash as the company becomes profitable. The big ROI comes when it is straight equity investment with plans for the company to be bought or to go public 4-8 years or more in the future.

Early stage equity acquisition can be great investment opportunities! These investments have the potential to reap big rewards for early investors who have an appetite for the risk and have the liquidity to make the investment. Just ask anybody who invested in Google, Amazon or Home Depot! The bigger the risk, the greater the reward! Success builds confidence! Put your money to work by helping a young company grow. Create wealth for yourself, other investors, and those founders and employees of the early stage company that can then be re-invested again and again.

Author Info: Karen Y. Rands

© Kugarand Holdings 2010

Private equity is a term that has developed over the 20th Century during various boom and bust cycles, and with this came the terming of various asset classes – namely the various kinds of private equity investment. Under this broad heading two major sub sectors came about in the form of leveraged buyouts and venture capital.

The first era of the private equity age came about from 1946 through to 1981, which saw relatively low levels of private equity investment – where the term still did not mean a great deal to the vast majority of investors. What is known as the First Boom and Bust Cycle took place from 1982 to 1993, which saw a large increase in leveraged buyouts climaxing in the huge buyout of the RJR Nabisco. This occurred just before the leverage buyout industry collapsed in the late 1980s and early 1990s.

The second boom and busts cycle occurred from 1992 through to 2002, which came about after a series of events including the savings and loan crisis, trading scandals of an insider nature, the collapse of the real estate market and the recession of the early 1990s. The dot com bubble brought this period to an end – when it burst in the collective face of investors.

The third boom and bust cycle took place after the dot com bubble, and saw unprecedented levels of leveraged buyouts up until 2007, when , as we all know by now, things started to go badly wrong.

Over the years North American private equity has been substantially ahead of the European counterpart. The liberalisation of institutional investors in Europe has lead to the maturing of the European market – making it one of the leading private equity markets in the world.

As the recession shows signs of those illusive green shoots, this business is back on track. Indeed, many would claim that a good time to get into private equity would have been very recently and indeed now. With so much upheaval in the markets, there have arguably been some very significant opportunities to be had, and many astute investors have grabbed the bull by the horn and made some serious killings.

There are of course numerous firms that help investors decide upon investment opportunities, as the whole business can sometimes be quite dauntingly complicated. These firms take into account a huge range of information, in many cases reducing the risk to investors a great deal.

Gino Hitshopi is highly experienced in the realm of private equity, having worked in the banking industry for many years. For more information please visit: http://www.preqin.com/itemSection.aspx?s=1

Much has been accomplished since the early days of modern microfinance when NGOs and organizations such as Grameen Bank started lending to industrious, but poor, communities in Bangladesh. The sector now touches well over 100 million people worldwide and boasts a total loan portfolio in excess of US$40bn. Although significant growth was originally catalyzed by grant-led initiatives, such scale would likely not have been possible without the participation of commercial capital. In fact, with billions of individuals still lacking access to basic financial services, representing an estimated demand of US$300bn in loans, the future role of commercial capital will be even more critical. The reality is that it is impossible for microfinance to achieve its full potential without the participation of private equity and debt investment. Quite simply, there is nowhere near enough grant capital available to meet the funding requirements of the world’s microfinance institutions (MFIs) as they continue to scale. 
 
A role for grant capital in microfinance, however, still exists. Indeed, there are many initiatives that simply fail to offer much potential for a commercial return, but are still critical to the continued development of the sector. These include programs for conducting social impact analysis or the development of microfinance products for “ultra-poor” clientele. In this respect, both commercial and grant capital can work hand-in-hand as the sector continues to evolve and bring more of the world’s poor into the formal economy.  
 
Private equity in microfinance is mostly invested in the form of early stage start-up or growth capital. This type of investing is very different from the large-cap private equity techniques employed in the developed world, where investee companies are often over-leveraged and streamlined in the pursuit of a short-term exit and return on capital. In contrast, private equity in microfinance often serves to strengthen balance sheets, not to weaken them, and the greater corporate governance requirements of such investors inevitably results in stronger organizations. An increasing flow of this type of capital will not only allow the sector to scale, but will also lead to greater accountability and transparency.
 
As an emerging sector within the global financial services landscape, microfinance stands to substantially benefit from the increased participation of private equity investors. Through the provision of risk capital, such investors will actively support new business models and lending methodologies. With this in mind, consider the interesting parallel of the positive role played by private equity in other emerging sectors, where it has often resulted in the financing of hundreds of innovative young companies. Not only have these companies generated attractive returns on equity, but many have also contributed considerable social value by improving productivity, health, and access to information, not to mention the many new employment opportunities they have brought to the market. Examples include technology, telecommunications, biotechnology and, most recently, clean technology, all sectors that would not have achieved the same level of success without the risk capital, strategic support and commercial networks that private equity investors provide.
 
While the volume of private equity invested in microfinance to date has barely scratched the surface of the sector’s requirements, there are already a number of examples of the positive role that this capital has played. In India, a series of notable investments has provided the foundation for increased outreach, greater geographic diversity, the introduction of new products and improved mechanisms to attract and retain high quality talent. Over the past two years, the five largest MFIs in the country have been the beneficiaries of approximately US$180m in private equity investment, which has helped them to grow their combined active client bases from 2.2 million to over 4.7 million, a compound annual growth rate of 45%. Four of these organizations are now serving well over a million active clients each. Furthermore, numerous new business models have been launched as a direct result of investor support. Of particular note are the branchless banking technologies currently enabling millions of previously unbanked individuals to efficiently access deposit accounts, government disbursals, insurance products, and even secure payment platforms.
 
Despite the positive impacts of such investments, some still criticize private equity backed MFIs for their rapid growth rates. This is potentially a valid concern, but prudent investors will always seek to temper such growth with conservativism, since a default-ridden loan portfolio is of limited value no matter how large it is. This ensures that the interests of private capital are aligned with those of the recipients of MFI credit – both parties benefit from growing a quality loan portfolio, promoting greater operational efficiencies and technological sophistication, and ultimately from accessing public capital markets. These benefits all serve to lower the operating costs of the MFI, therefore resulting in a lower cost of capital and more efficient service for the end client.

As we reflect on the evolution of the microfinance sector from its origins in 19th century Germany*, and its subsequent development in South Asia, it is clear that an increasing participation of private capital has already stimulated greater competition amongst for-profit MFIs. This will ultimately lead to lower interest rates, a higher quality of service, and a greater diversity of products. Further private equity investment will be a key factor in enabling the sector to reach the billions of unserved clients who still live outside the formal financial system. It will also help more MFIs take a number of important steps towards better serving this market by securing banking licenses (enabling cheaper funding through deposits and a much needed saving tool for their clients), attracting world class talent and accessing cheaper capital markets. As we have seen, private equity and grant capital are far from being mutually exclusive and can actually co-exist. Grants have already realized many valuable developments, and in the future it is likely that this type of capital will also address many more important issues such as the measurement of microfinance’s social impact, the best way to serve the poorest of the poor, how to increase financial literacy, and how best to deliver complementary services like healthcare and education. Each of these is very valuable, not only for the clients concerned but also for society at large, strengthening the sector overall and thereby complementing the ongoing efforts of private equity investors.

* Raiffeisen Banks were founded in 1846 in rural Germany and are early examples of microfinance institutions. Many of them are still in operation today, functioning as co-operatives or savings banks.

Justin Willmott is a Vice President with Legatum Ventures, based in Dubai. Legatum Ventures has invested over $60 million of private equity to support the microfinance sector globally since 2007, and continues to be an active supporter of the sector as it develops towards reaching its full potential.

This article earlier appeared in Microfinance Insights magazine in June 2009.

Making your business attractive for private equity funding is not as easy as many businessmen think it to be. Contrary to popular belief, making investors bite takes more than just pitching a good idea, and then waiting until they send cash your way. It may even take years before a company can become “investment ready.”

Here are a few guidelines for those who are hoping to attract private equity investment for their companies:

Build your management team. Ensure that the members of your board have competence and experience. Strong boards impress private equity firms. Investors must also be convinced that they can develop a smooth working relationship with the board in the event they decide to join it.

Get good advice. You must appoint an advisor whom you can trust; one who knows the nature of your business, from inside out. Choose an experienced advisor who can give an honest, professional opinion on the status of your business, whether it is investment ready or not, and make more accurate forecasts about your financial prospects.

Tell investors why your business is worth their money. Investors need to be convinced that they are banking on a firm after being presented a clear picture of its history, strategy or financial status. You must be able to spell out in exact terms and figures why investors should support your company above others. Presenting a sound and realistic proposal is crucial. Experienced investors can smell a bluff from miles away, so forecasts about your company must be realistic.

Show where you are now. Familiarize investors with your firm’s current position.

Inform them about your product/service, who your principal clients are, main competitors, and your target market.

Show you can grow. A well-written and concise business plan with three-year forecasts, objectives and growth strategies appraises investors of the growth potential of your company. Predictions must be measured, realistic, robust, accurate and achievable.

Stan Stonesgate follows the private equity industry and collects investment advice and news on his website, http://finance-private-equity.com/