The use of private equity

Introduction and definition Private equity involves investing in private, unlisted companies. The aim of this operation is to inject funds into a company in order to help it grow over a period of approximately 3 to 10 years, before exiting and making a profit. Private equity can be used at different points in a company’s life, depending on the investor’s strategy. These investors may be different players using different financing methods.   1/ Strategies – Investment stages Stage 1: Seed capital stage Seed capital involves investing in the start-up phase of a high-potential company, or in the early stages of its growth. As the target company is in the start-up phase, the investor can also provide operational and strategic assistance to support its development. This type of financing is common for start-ups. Investing in private equity at this stage represents a potentially high return, but also a very significant risk. As the company is in its early stages, investment needs are high, but the business model for making money may not yet have been found.   Stage 2: Expansion capital When the company is in a growth phase and expanding, investing in it represents a second strategy to further strengthen and extend its business. This may involve financing new acquisitions or moving into new markets. The aim is for the target company to reach a milestone in terms of growth: sales, profitability, market coverage. At this stage, you need to be aware of the risk of share dilution: if the company issues a large number of shares to raise additional funds, the investor’s stake, although high, may be low in the end. Although the risks are lower than in the seed phase, they still exist, as the development of the business may still represent a critical phase if growth does not materialize.   Stage 3: Capital transmission This third strategy involves investing in a company when it has reached “maturity”. The funds invested are then used to prepare for the eventual transfer of the business to another entity, or to a company in which the management and shareholders of the former also own a stake in the latter, in the form of an OBO. The investment is often leveraged (LBO), as the company is already profitable.   Stage 4: Turnaround capital This is the opposite of the other strategies and involves investing in a company in difficulty! The idea will then be to inject funds to turn the business around and also to restructure the company by changing management and, ultimately, to sell it at a profit. In this case, the risks may be equivalent to those involved in seed financing.   2/ Type of investormstrong Private equity deals can be carried out by a number of different players. Although the entry ticket is generally high for this type of operation (with the exception of seed capital), it is still possible for individual investors to participate. However, the majority of investments are still made by professionals such as venture capitalists, venture capital funds or private equity funds. A significant proportion of individual investors are experienced entrepreneurs or working executives who bring expertise to the target company in order to develop the company’s growth.  3/ Exit. Planning the exit: From the outset of the deal, it is necessary to plan the company’s exit strategy. To do this, the investor will take into account the company’s business, its objectives and the market, in order to sell at the most favourable time. A shareholders’ agreement will need to be negotiated, and the investment tools will need to be clearly defined (ordinary shares, preference shares, convertible or non-convertible bonds, share warrants, etc.) Valuing the company: To determine the value of the company and thus set an optimum selling price, it will need to be valued. This valuation will be based on a certain amount of information about the company, such as its balance sheet, its present and future growth, and its profitability. In most cases, unless there is a downturn, investment banks carry out these transactions. They will have received a mandate to sell the company.  Choosing an exit: The choice of exit method is important: determining the one that will be most profitable for the investor. It is possible to exit in several different ways, and in particular by IPO, sale or back-to-back (inter-compensated credit and investment transactions).  The post exit: Once the sale has been completed, it remains important to ensure that the transaction is carried out in a compliant manner, in application of the agreements entered into and, in particular, the guarantees that may be provided for in the sale.  Remember: it’s always a question of taking risks, but these must be measured and controlled by a financial and legal approach. NMCG can help you do this.