Private Equity (PE) and Venture Capital (VC) simply means the provision of capital by the investor or investment fund manager and the entrepreneur, with the aim of developing the business and creating value. The process that is often characterized by lengthy negotiations between the different parties seeks to raise capital for businesses while offering an equity stake to the investors.
Venture capital can be viewed as a segment of private equity, from an academic point of view. But for the purpose of making investment decisions, their respective characteristics are sufficiently distinctive that they are treated differently. Private equity investors tend to target fairly mature companies, which may be under-performing or under-valued, with the goal of improving their profitability and selling them at a higher price while Venture investors, on the other hand, target early-stage and expanding companies (or call them start-ups) with fast-growth potential, with the objective of nurturing and growing them quickly, then selling them at a much higher price in future. Private equity covers not only the financing required to create a business, but also includes financing in the subsequent development stages of its life cycle.
Private equity firms have one main goal: seek out companies with the potential for growth and with the aim to put in place the capital, talent and strategy needed to permanently strengthen the company and raise its value. In the field of finance, private equity is often categorised under the umbrella of “alternative investments”, complementary to the stock and bond portfolios traditionally used by investors.
Our experience at BLEGSCOPE is that each business has its own ambitions, abilities and needs. Thus, not all of them will be suitable for private equity. To take finances under a private equity arrangement, entrepreneurs must be prepared to;
- Cede part of your business to a private investor and be willing to share certain strategic decisions with shareholders outside your “inner circle”.
- Conceive a scenario beyond working as an entrepreneur but also be mindful of additional reporting to other partners. This will call for formalisation of the business operations that will also involve running the business with clear structures and delegation of some responsibilities to your team.
Most private equity firms are interested in investing in businesses that operate in a growth market and have certain technological or competitive advantage that can be developed or exploited. They also have a preference for very ambitious business leaders with experience in managing fast growing businesses. All PE firms will always be keen on identifying a realistic exit strategy. This is very important to them since it’s the time when their value that is injected in the business is realised.
The key advantages for raising finances under the private equity arrangement are;
- Ability to raise long-term capital that would otherwise not be realised with the commercial banks to undertake capital intensive ventures.
- The arrangement results into a partnership with other shareholders thus sharing the potential risks and the rewards.
- It is an investment fixed within the framework of a negotiated contract which enables smooth operations between the different parties.
- With an entry of a PE firm in the business, the entrepreneur triggered to adopt high-performance management standards and corporate governance practices.
- Most businesses get privileged and enjoy strategic and operational support along with financial advice in times of crisis
- With a PE partnership, entrepreneurs are assured of assistance with subsequent financing operations if they conform to the pre-agreed partnership covenants.
In Uganda like in many other sub-Saharan countries in Africa, PE and VC are not new but have remained very rare financing options for many businesses. The informality of our business structures, poor corporate governance and the conservative nature for reluctance to cede a portion of both ownership and control remain the key challenges to the growth of this financing option.
Brian is the Managing Director at BLEGSCOPE®, and has over 9 years of management consultancy experience notably in the finance and banking industry, MSMEs, FMCG companies and in the service industry. You can follow him on twitter: @BrianAhabweK