| Understanding private equity funds and what they | | | | management fee, which is a percentage of the |
| can do for your business may be invaluable if you | | | | amount in the kitty, and a share in the profits. In |
| are contemplating sources of additional financing. | | | | truth, however, what they’re really after is |
| Private equity investments play a huge role in | | | | an opportunity to eventually sell their stake at an |
| sustaining entrepreneurship, funding over 50,000 | | | | enormous premium which could be three to five |
| deals valued at several billion dollars each year. | | | | times their initial investment! |
| What exactly is private equity? How do | | | | If you think that private equity financiers are |
| businesses attract such funds? What do private | | | | merely sources of risk capital, you’re way off |
| equity investors bring to the table and what do | | | | base. You can be sure that they will take an |
| they expect in return? Answering these questions | | | | active interest in your business, especially since |
| is the first step to understanding private equity | | | | there’s a few million dollars involved. |
| funds. | | | | However, that’s not always a bad thing. |
| By definition, private equity funds come from… | | | | Partners of private equity firms usually bring a |
| well, private sources. We’re not trying to act | | | | wealth of experience, and could add value in |
| smart here! Sources of private equity are usually | | | | terms of building long term strategy, forging |
| high net worth individuals, those who have a few | | | | alliances or bringing new customers. |
| million dollars in loose change and looking to invest | | | | Private equity funds run through hundreds of |
| it into businesses with solid growth potential. | | | | proposals from hopeful business owners, before |
| Usually, the money from a core group of | | | | short-listing a lucky handful that catch their |
| investors called the general partners is | | | | interest. Therefore, understanding private equity |
| consolidated and a partnership firm is formed to | | | | funds’ expectations from target companies is |
| manage the investments. Other entities such as | | | | of essence, if you want to be among the chosen |
| pension funds and financial institutions are also | | | | few. If you don’t know any investors, talk to |
| invited to participate, most likely as passive | | | | agencies such as Funding Post which bring |
| financial investors. The fund is invested as equity | | | | entrepreneurs and financiers in contact with each |
| for a limited time frame into several companies | | | | other. Typically, the decision criteria for investing in |
| which are chosen on the basis of stringent criteria. | | | | a business involve market potential, growth |
| Typically, private equity funds last about 10 years, | | | | opportunity, long term sustainability, exit |
| by which time they would have exited most of | | | | opportunities and most important, quality of |
| their investments through various means. | | | | management. You will certainly be required to |
| An important part of understanding private equity | | | | make a very detailed and well thought out |
| funds is to recognize what makes them tick. | | | | presentation, outlining your vision for the future of |
| Private equity investors are on the lookout for | | | | the business. But even more critical is the |
| firms that can deliver significantly high returns; | | | | impression you make on the investors, and |
| however, this usually means that they have to | | | | whether you can convince them that you have |
| assume higher risk. It is widely observed that not | | | | what it takes to deliver. It is well known that |
| all investments come up trumps, and therefore | | | | investors would rather back a brilliant |
| investors have to be prepared to lose their shirts | | | | management team with a mediocre idea than the |
| with some. However, as long as the fund makes | | | | other way around. And that, in a nutshell is what |
| a profit on the whole, their purpose is largely | | | | private equity is all about. |
| served. Fund managers are compensated with a | | | | |