Profitable Investments With Private Equity
Private Equity Funds are basically initiatives that aim to create economic profit by becoming partners in companies with growth potential or underperforming companies and selling their shares after increasing their value.
The resources in the hands of these funds are created with the capital provided by wealthy individuals and institutions, especially retirement funds, who want to make long-term investments.
Funds managed by expert professionals become partners in companies where their value can increase, and after making the necessary changes in the management and strategy of the company and increasing the value of the company, they exit the investment by selling their shares (usually after 3 or 5 years).
These types of investors generally do not invest in ideas or early-stage startup businesses. Before considering an investment, they look for a good and proven history of the company covering a period of 3-10 years.
Since this type of investor is generally used for growth, companies that want to benefit from such funds should have a clear growth strategy.
What Is Private Equity Investment And How Does It Work?
Similar to the fact that high capital companies, commonly called hot money, hedge funds can only act for profit on world stock exchanges, partnerships that start to buy national and international companies only for profit and will sell or close these companies to anyone when their profitability is over are called private equity investments.
Private equity, in its simplest form, refers to investments made by individuals or companies in companies that are not publicly traded rather than publicly traded companies. When a business seeks private equity, it usually approaches private equity companies or high-net-worth individuals who want to invest in promising ventures.
Private Equity Funds can take various forms, including equity investments, management takeovers and acquisitions, and venture capital investments. Private equity is an alternative way to increase investment, especially in the technology field, which is very popular for small and medium-sized enterprises and start-ups.
What Are Private Equity Funds And How To Invest In Them?
Private Equity Funds provide the growth capital they need to make new investments and expand abroad for the companies they are partners with. In this sense, partnering with Private Equity Funds can be considered as a serious alternative to borrowing to finance companies.
Especially in family companies, if there are new generations or family members who do not want to continue working, such Funds help both the survival and growth of the companies by purchasing these shares.
Private Equity Funds also help these companies gain a competitive identity and continue to produce healthy economic benefits by improving the management of companies that are not sufficiently developed in terms of management principles.
After investing in a company, a Private Equity Fund will request certain rights from the existing shareholders. These rights vary depending on whether they are minority or majority shareholders.
How Do Investment Processes Work?
The likelihood of a company attracting the attention of Private Equity Funds will increase significantly if the candidate company meets the following conditions:
- Can demonstrate that the company has good and competent management,
- Has at least 3 years of financial statements audited by an independent auditing firm,
- Has a clear and detailed business plan for the next 5 years.
Funds stay in the companies they are partners with for a certain period and then want to exit the company. Exit plans are a significant issue that leads to deal breakdowns, and many businessmen do not care about this issue at the beginning.
Therefore, they may not fully understand or be interested in exit mechanisms. Funds exit the investment either by publicly listing the company they are partners with on the stock exchange or by selling shares.
Another method is to buy back the shares sold to the fund at the time of “exit” and this should be defined in the partnership agreement.
How To Manage Portfolio Companies?
When companies approach a Private Equity Fund, one of two things usually happens:
- If the company is first approaching a fund of this type and does not have good corporate counsel who understands the Private Equity world, the experience is usually unpleasant and the meeting may not last very long.
- If the company is prepared to take advantage of venture capital and has good corporate counsel or has sufficient knowledge and experience of partnerships in the Private Equity world, the negotiations go well until the final stages. Unless there are any unexpected legal and/or accounting issues during due diligence, the partnership will usually happen.
What Are Exit Strategies?
In private equity funds, exit strategies can be realized by directly selling the company, merging with the business, or purchasing it. The entrepreneur who exits his ventures can use the exit capital in new ventures and investments. He can guide entrepreneur candidates with his financial resources.
The ventures established by entrepreneurs who want to establish their businesses and meet the demands of the market are invested by investors when they are successful. In this way, the business ideas developed by the entrepreneurs can be further expanded.
Depending on the investments and the development of the venture, when the ventures grow, they can be sold to shareholders and investors. All shares can be sold to existing partners and investors and entrepreneurs can leave the company by receiving money from the sale of shares.
Within the framework of the rules, the venture can be offered to the public or sold directly.
See you in the next post,
Anil UZUN