In your DNA as an entrepreneur – Private Equity Focus

Private Equity
Photo Credit: Rodrigo Amorim

Private Equity

In our current bid to transform the fortunes of our economy, one cannot overestimate the importance of private equity funds in supporting entrepreneurial development. The current financial climate and as has always seem to be, is very tight with regards to accessing capital by startup companies and committed business people with infant businesses in need of expansion. The African financial climate is marred by high interest rates in both formal and informal banking sector with these financial intermediaries having the welfare of their shareholders as their sole priority. It is also quite surprising that development banks and micro-finance institutions with some social objectives are rather the institutions with their effective interest rates greater than 60% often hidden in upfront ‘processing fee’ charges. Currently it is very difficult to distinguish between the principal operational models of core banks and development banks as the scramble to top the industry toughens with far more unbanked citizens and businesses continue to outweigh their banked counterparts. The later causes a wide gap between entrepreneurial business aspirations and the development banks’ vision for their customers and this often fuels the drive for alternative means of non-traditional fund sourcing.

Private equity is mainly risk capital provided to businesses for a wide range of reasons ranging from finance for Small and medium-sized enterprises (SMEs) to purchase of large quoted companies. In each instance, an investor or a group of investors pool funds together privately to invest in the new venture1. The European Private Equity & Venture Capital Association (EVCA) describes Private equity as the injection of equity capital over a medium to long terms to high growth potential non-quoted companies3. A key attribute of private equity funding is the interaction of the investors with both shareholders and management. Interestingly, in the case of startups, the shareholders are usually involved directly in management and this is the focus of this discussion.

The DNA Model

The integration of investors in the thrust of all economic activity that creates the marriage between the business’ philosophy and the investors’ vision causes a requirement of essential attributes of the entrepreneur. The Ernst & Young DNA of the Entrepreneur model is one that every entrepreneur must focus their attention as it holds varying and rather essential attributes.

The DNA model
Source: Ernst & Young. (2012)

The DNA model has two important attributes in its core;

  1. Having an opportunistic mindset
  2. Acceptance of risk and potential failure.

It is critical, amidst all the turbulent and fast-paced business environment entrepreneurs currently operate in, to demonstrate their entrepreneurial credentials2. Whether seeking out business in new markets or in existing ones, it is important to seek innovative ways of financing deals, identifying and targeting potential growth paths and creating niches to beat the bottlenecks in their immediate environment. The financing gap that private equity investors often bridge is critical in the sense that the funds are made available to undervalued or underperforming companies with high growth and improvement potential2. This risk acceptance characteristic is usually underpinned by the core vision of the ventures and their realistic potential to succeed in their niches and add value and corroborated by the medium to long term investment tenure.

No matter how exuberating investors’ perspective of any venture is especially resulting from a high growth potential operational industry, it becomes suddenly useless without the exhibition of some traits by the entrepreneur. This leads us to the traits around the core in the DNA model.

  • Drive, Tenacity and Persistence

Perhaps the most rigorous trait is to be alert and aware of the operating environment. As with every competitive venture, the business environment is very important as it is dynamic and competitors change rapidly to adapt to information. It is important that as a venture with augmented capital from private equity, the entrepreneur aligns to the medium to long termism aspirations of the principals.  Having the drive and persistence to adapt to the quickly changing direct and indirect factors affecting the bottom line is required keeping in mind the opportunistic mindset, i.e. creating opportunities from potential and realized challenges. Private equity investors list value creation as a main focus of their decisions1.

  • Seeking Niches and Market Gaps

Investors in private equity do not usually expect that they quickly monopolize a venture but as pointed out already, they have an unyielding drive for continuous growth. This means that management is required to take charge in identifying and exploring varieties of funding strategies including hedge funds and debt. Also the entrepreneur can in line with the business’ vision seek out new emerging business sectors in order to expand and meet specific objectives. This proves that investors are committed to moving the ventures to success through profit growth rather than focusing on the returns via financial engineering.

  • Build an Ecosystem of Finance, People and Know-how

Investment in Information Technology and a strong back office support is critical for every entrepreneur. It is a widely known fact that investors will only invest where they find that the business has some core structure on which to build in terms of business processes and governance. This allows the company to respond appropriately within legal and regulatory boundaries as well as provide a sound backing for business decisions1. Timely robust, and organized information is a requirement for investors to make funding decision and approve strategies and the focus as usual is based on sectors that show high growth opportunities.

  • Building Success and Culture Values

As entrepreneurs, the allocation of capital to investment projects and assets should be done with some strategic focus. If this value affects every decision taken, the expectation of all relevant stakeholders will remain in sync. In the same vein, investors need to recognize the dynamism of the playing field and adapt their expectations to ensure success as well as proactively adjusting their risk appetite.

  • Nonconformist and Team Player

Private equity investors usually intervene when they are needed most. As indicated above, usually when the venture is in some form of turmoil albeit in a highly growth prospect industry. The entrepreneur needs to steer the venture towards the positives for which the investor has subscribed.

  • Architect of Own Vision: Passion and Focus

As entrepreneurs with vital prospects, the broad vision coupled with the attributes indicated above should allow some resilience. As private equity funds only find its way to highly growth potential ventures, the focus on turnaround strategies is paramount, with the success poaching decision and opportunistic attributes activated and ready to transform the fortunes.

It is essential to keep investors from considering exiting from the agreement, thus, it is important to keep the business vision aligned with theirs. Often, the investors rely on the input of fund managers who are also largely entrepreneurs. Processes and proper management sets the tone for a positive outcomes as fund managers use appraisal techniques such as required return rates to evaluate the performance of the funds especially in the post-creation and development phases.


References:

  1. Ernst & Young. (2012). Global Private Equity Watch – Striving for Growth – A Return to Entrepreneurship. Ernst & Young.
  2. European Private Equity & Venture Capital Association. (2007). Guide on Private Equity and Venture Capital for Entrepreneurs – An EVCA Special Paper. EVCA .
  3. Gilligan, J., & Wright, M. (2010). Private Equity Demystified – An Explanatory Guide. ICAEW Corporate Finance Faculty.