Attracting Private Equity and Venture Capital: Growth, Performance & Succession Policy
This article follows on from our previous post: What does it take to attract Private Equity and Venture Capital for growth?
Growth, whether organic or inorganic (expansion by mergers and acquisitions), is often the most important driver of value. The main challenge management face in achieving ambitious targets is to assess the most optimal funding structure suitable for their company. There are several funding options available in our markets, these can be primarily categorized into debt and equity.
Debt, typically consists of various forms, these include:
- Local currency or foreign denominated loans from commercial and development banks;
- Mezzanine finance (recently seen in our markets);
- Convertible loans;
- Bonds and other more complex instruments like securitization.
Similarly, equity also comes in various forms:
- Current shareholders may choose to inject new capital;
- New shareholders through selling a stake in the company (to PE or VC funds) or issue of new classes of shares; and
With such a plethora of options, it often leaves the Management in a quandary – what source of funding should I choose and what are the pros and cons of each option for the company, other stakeholders and key management? It is at this juncture, you need independent, robust and thoroughly researched options for the company. An important aspect is to analyse the impact of these options on the key financials forecast by management and also the softer aspects of each option. It is critical, for the key management and the company to find a funding partner that has the same fit – values, culture and shares the company’s vision.
The next challenge for management is attracting the PE and VC partners. Therefore, ‘packaging’ the company and presenting the investment opportunity and value add is of vital importance. At first glance, this appears easy to do and not time consuming. However, if a robust business case was to be presented to PE and VC, they will ‘kick the tyres’, and, for this management has to be thoroughly prepared. Preparation for such initial presentations takes time and requires reputable professionals.
Coupled with the growth agenda comes performance enhancement. Management need to run their business in an efficient and profitable manner if they are to attract the right investors who can further contribute positively to their growth and expansion plans.
The first step in performance improvement, is to identify the areas requiring performance enhancement. Again, this is time consuming as often one needs to look at the business under a different operating model to the current one. By this we mean, if the reporting and operations are being run by products then what would the business look like if it were analyzed by geography or effort? Often times, such a review can drastically change the investment case for growth set out above, which in turn can have an advantageous or disadvantageous impact on the fund raising program.
PE and VC specializing in certain industries can bring with them new ideas that help management to improve the performance, add value to the business and resolve the financing needs.
Next comes the question of how to enhance the performance? That is, implementing the performance enhancement strategy also requires hands-on management. Such changes in processes and controls can be time consuming, potentially distracting management from the day to day running of the business. Reputable professionals can help develop a detailed implementation plan and take full responsibility for executing that plan with regular reporting to the management.
After having been through the growth and performance thought process, management may find themselves at another cross road. Do I want or even have the energy to take my business to the next level, in other words, to execute the strategies (growth & performance) set out above. There can be a variety of answers:
- How can I benefit from the increase in value but take a back seat role?
- I have other interests and priorities to pursue so how can I exit?
- I am ready for the next phase of the journey.
With respect to the first two questions, owners of SMEs should focus on disposing off a part or their entire stake in the company but keeping in mind the ‘value’. Doing the bare minimum, involves continuous development of innovative products and services, retaining their competitive edge in the chosen target markets, investing in robust ERP systems and having the best people in place.
To summarize, attracting PE and VC is a skill, involve us for a successful transaction and project. Remember, such a step is a medium to long term journey, therefore identifying the right partner through this journey will be the success to unlocking value in the business.
About Sheel GillSheel Gill is the Head of Transactions and Restructuring - East Africa. She has 19 years of financial and accounting experience, having qualified as a UK Chartered Accountant in 1996. She has been responsible for a range of audits, corporate finance and transaction projects to a diverse portfolio of clients. Sheel has worked in Kenya, UK and Germany across all sectors. She has experience of leading some of the largest acquisitions, vendor and refinancing due diligences and demergers.
bonds, company vision, convertible loans, culture, economic growth, expansion plans, financial forecasts, growth, growth agenda, impact, key management, loans, local currency, management, mezzanine finance, new classes of shares, PE, performance enhancement, private equity, pros and cons, shareholders, stakeholders, transaction, unlocking value, values, VC, venture capital