FBNQuest has highlighted what companies raising funds through private equity and alternative investments stand to gain.
In a report, the company explained that although there are various options for raising capital and attracting investors, equity is one of the two most sort after options.
The option, it said, allows a company to give a share of ownership of its business to an investor in expectation of a return as the business grows. Unlike public equity (stock market) with ownership of shares in a public company, private equity (PE) simply means ownership of shares in a private company.
“To avoid debt, companies can sell its stocks to raise money that can be used to fund new technology, make acquisitions, expand working capital, and fund projects geared towards business growth. Usually, the financial information on stocks of such a company is not disclosed to the public, rather an investor can only speculate on the asset worth of the intending company,” it said.
FBNQuest said private equity involves three parties: the investors who supply the capital, the private equity firm that manages and invests the money on behalf of the investor via a private equity fund, and the company (known as Portfolio Company) that the private equity firm invests in.
“A private equity firm’s ultimate goal is to sell or exit portfolio companies to deliver superior returns (above the benchmark return also referred to as Internal Rate of Return (IRR) to earn carried interests). The most widely adopted investment strategies by PE investments are leveraged buyouts (LBOs) and venture capital (VC) investments,” it said.
In LBOs, a PE firm will raise debt from institutional investors on the back of a target company and assume control of the target company, while using the cashflows of the target company to pay the acquisition capital,” it said.
“Generally, private equity firms are active investors who are involved in the board level and monitor the financial and operating performance of portfolio companies. However, some private equity firms are involved in the day-to-day operations of portfolio companies and may take C-level positions such as CEO, CFO, CIO and COO to ensure that value creation initiatives are implemented in the portfolio companies to ensure that increase in revenue, improvement of operational efficiency and corporate governance”.
FBNQuest said a private equity fund is typically opened to institutional and accredited (individual or business entity) investors who invest large sums of money for a long period. Institutional investors are companies or organisations like endowment funds, commercial banks, hedge funds, mutual fund managers, and insurance companies that invest money on behalf of other people.
It said accredited investors on the other hand are individuals or a business entity that invest based on their income, net worth, asset size, governance status, or professional experience. The reason is that private equity as an asset class is generally illiquid and has a long lock-up period and only ideal for investors with a large asset size (or AuM).
