Introduction
While evaluating today’s scenario “Private Equity Funding is becoming a major component of the alternative funding options and is now broadly accepted as an established investors by the modern age SMEs as well as it is being considered as a standard asset class within many institutional portfolios. Many investors still with little or no existing allocation to private equity are now considering establishing or significantly expanding their private equity programs.
Private equity investing may broadly be defined as "investing in securities through a negotiated process" majorly in unquoted companies. Private equity investment is typically a transformational, value-added, active investment strategy to be evaluated as active partnership status.
Different types of Private Equity
· Seed stage: Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase. Normally funding Value goes around 50 Lacs.
· Start-up stage: Financing for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their products commercially and are not yet generating a profit. Normally funding Value goes upto 5 Crores.
· Expansion stage: Financing for growth and expansion of a company which is breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development, and/or to provide additional working capital. This stage includes bridge financing and rescue or turnaround investments. Normally funding Value goes upto 25 Crores.
· Replacement Capital: Purchase of shares from another investor or to reduce gearing via the refinancing of debt.
· Buyout: A buyout fund typically targets the acquisition of a significant portion or majority control of businesses which normally entails a change of ownership. Buyout funds usually invest in more mature companies with established business plans to finance expansions, consolidations, turnarounds and sales, or spinouts of divisions or subsidiaries. Financing expansion through multiple acquisitions is often referred to as a "buy and build" strategy. Investment styles can vary widely, ranging from growth to value and early to late stage. Furthermore, buyout funds may take either an active or a passive management role.
· Special Situation: Special situation investing ranges more broadly, including distressed debt, equity-linked debt, project finance, one-time opportunities resulting from changing industry trends or government regulations, and leasing. This category includes investment in subordinated debt, sometimes referred to as mezzanine debt financing, where the debt-holder seeks equity appreciation via such conversion features as rights, warrants or options.
Major Characteristics
1. Private equity is much costly source of funding.
2. Most of the companies opted for this path only when their projects were on going and heavy capital expenditure was already spent and for further fund arrangements their alternate options were closed.
3. It is much Risky source because on the grey side, if venture fails Entrepreneur may lose the ownership.
4. Active operative participation in business is taken by the Investing funds; in most of the cases professional CEO is demanded.
5. Strategic discipline is implemented.
6. New platforms are available for the company & sometimes new contacts are developed.
7. Good for those who wish to create equity value open minded; they may feel like a mini IPO Situation.
8. Revenue attraction should be there; Only win-win situation makes relationship.
Positives
a) Big consultants & professionals is accessed.
b) Technological limitations can be removed; Innovation lies with technology.
c) Standard operating procedures are implemented since day 1.
d) Scale of operations can be increased at once.
e) Credibility of company increases.
f) Geographical development is obtained.
g) MIS is much improved to include track over sales & inventory.
Constraints
a) Valuation mismatch
b) You don’t just invite money you also have to welcome.
· Corporate governance norms
· Operative partner
· Strategic consultancy
· Financial discipline
· New technology
· At last only for those who want to run fast
c) Barriers of company - Managerial style, valuation of company, Market risk & project viability etc..
d) Hunger for growth in promoters is essential to grow.
Take care while choosing PE Partner
· Chemistry between you and PE firm.
· Both parties have Expectations to make money
· Same thing can be perceived as interference and helping hand it is just angle of view.
· Evaluate is like entering in to partnership; You must have growth mindset.
· Legal documents are nevertheless as unwanted break is bad for both.
· Both parties are happy & satisfied if growth is there
· You should build credibility & fairness between each other
· Business model should be improved first by huge amount of delegation, departmental self sustainability, improvements; professional management etc.
Average cost of funding
Ø Minimum cost to company may be around 16-25% P. A.; depending upon market conditions & sector of investment, otherwise they would share in corporate growth on pro-rata basis.
Average Size of funding
Ø Any Private Equity seeks an average period of investment for 4 to 5 years and An Investment size of Minimum $5 to $100 mn.
Debt vs. Private Equity
a) Debt is much cheaper source of funding; PE offer is a costly decision.
b) Time lag in equity is much more than using debt fund.
c) As compared to your debt; Collateral while inviting equity is your company itself.
Exit options for PE
· IPO
· Take over by another PE Firm
· Buy-back
· M & A
