18.02.2010 18:17:25

Investors Network Team

Historically many entrepreneurs and business owners have seen private equity funds as the barbarians at the gates. Today Private Equity for Entrepreneurs is a real possibility with these firms already owning huge chunks of industry, including Whitbread, Weetabix, Medikredit, and KwikFit. South African private equity firms raised at least R 100 00 billion in 2008 and are often BEE compliant. They are said to be risk averse, but do take risks and not all their investments pay dividends - or survive. The point is, with record sums to invest, can start-ups and existing smaller ventures count on this form of investment to raise business finance?

So what does private equity firms look for?
·    Return on investment – normally at least around 40% return – So high growth to you and me!
·    People with vision, self-confidence, drive and energy, with aspirations to grow the business;
·    A clear team leader and team with complementary expertise, such as management, marketing and finance;
·    Market knowledge, a growing market, or an innovative product;
·    A product or service with a competitive edge or unique selling point; and
·    An exit route, that is, a chance to sell the shares within five to seven years, either back to the business itself, to another investor, or to the public by a listing on a stock exchange.

Let's assume you've got a great idea for a new business, but it needs serious funding - well into six figures. Can you count on your bank's support? Is venture capital a more likely route? Or private equity funding? What about business angels? How do you find them and choose the best one?

Even if your bank refuses to play ball, others, such as online banks and former building societies may be more helpful and even charge less. Unless you can find a small private equity fund, the big ones are more interested in mega deals. There is a lot of private equity capital about for small businesses, says one corporate finance adviser. How can it be accessed? If you want funds to expand your skills base, achieve faster growth or launch new products, money can be found.

Your first point of contact should be your accountant or lawyer. They can help you prepare a professional approach to your bank. They are also likely to have a wide network of contacts looking for investments.

Don't count on a swift outcome, however - even if you've already found a suitable site and equipment and the right staff - if everything depends on a fast infusion of cash.

It took Nkosi Zuma a year to raise the money to set up French Toast, a new sandwich, salad and hot food bar, near Cape Town city centre, which opened last October. With extensive retail experience, she approached her bank, but also a small private equity fund and business angels. The bank was prepared to lend part of the funding, provided he could attract additional equity capital.

She found four private would-be investors, all of whom are now non-executive directors. They are people with wide experience - two in retailing, one in marketing and one in corporate governance and finance. The deal was done and the business could get of the ground.

You won't need to pay any interest, as you would with a loan. Your business will be expected to generate substantial profits, so that equity partners earn good dividends on a regular basis. Your private equity partners could bring new networks, useful contacts and management assistance. You will be required to regularly generate detailed information on your business's performance and prospects. The involvement of the private equity in your business usually makes it easier to get other forms of finance, should you need it. The cost of complying with financial regulations can be high. It focuses your business's objectives and ensures structure, discipline and a stable base for strategic decision-making. It requires you to give up a share of the business, and to share decision-making and profits. The capital injected strengthens your balance sheet and reduces the gearing (the proportion of debt relative to equity). The demand for high returns may introduce the danger of short-term thinking.

All in all, as a innovative entrepreneur you will probably consider Private Equity if you can get it. The benefits do far outweigh  the drawbacks and if you really want to see your business idea become a reality then this really needs to be at least a real option to consider.