PRIVATE EQUITY FIRMS AND VENTURE CAPITALISTS

Group 17Saurabh Chaubey (Roll No 56)Vinay Prabhakar (Roll No 67)

PRIVATE EQUITY

Private Equity

Buyouts Venture Capital

Growth Capital

Mezzanine Capital

DEFINITIONS Private Equity can be defined as the provision of equity

capital by financial investors to non quoted companies with high growth potential.

Venture Capital is strictly speaking a subset of private equity and refers to equity investments made for launch, early development or expansion of business. It has special emphasis on entrepreneurial undertakings rather than mature business.

MAIN OBJECTIVES OF PE FIRM Seek out companies with the potential for growth and

with the aim to put in place the capital, talent and strategy needed to permanently strengthen the company and raise its value.

EQUITY FIRMS BRINGS Long term capital, solidly underpinning your company’s growth Increased visibility with bankers, suppliers and clients A partnership, sharing of risk and rewards An investment fixed within the framework of a negotiated

contract The adoption of high-performance management standards Strategic and operational support along with financial advice in

times of crisis Assistance with subsequent financing operations Alliance due to investor’s network of contacts and portfolio of

investments A partial or total exit strategy

EQUITY FIRMS LOOK FOR High growth ,competitive product or services In the case of disposal or transfer, recurring profits A stable and qualified management team , capable of

turning the negotiated goals into reality Solid management procedures, either already in place or

able to be quickly put in place An agreement on the investor’s exists

PRIVATE EQUITY MODELInstitutional Investors

Private Individuals/

Family Corpora

tes

Private equity investmet

fund

Portfolio Company 2 Advices

Pr ivate E qu ity(In vest ment Fu nd ) Man agement

comp an y

Portfolio Company 1

$

Government Others

PRIVATE EQUITY MODEL Creation of fund and underwriting by professional

investors Investing the fund Managing the Investment RedistributionHow Do PE Fund Works• Funds with Limited Life Span• Funds with unlimited life span

DIFFERENT TYPE OF PV INVESTMENT FUNDS

Independent private equity Captive funds Semi-captive funds

WHAT VC IS AND WHAT IT IS NOTWHAT IT IS WHAT IT IS NOTA source of capital for high risk businesses Right for “lifestyle” businesses or those

without strong potential for growthA source of “patient” capital Money without strings or costAn investment in the business Money to repay nonbusiness-related debts

and expensesMoney to drive business growth and development

An inexhaustible supply of money that will continue indefinitely

A validation of the business by outsiders Free from restrictions and conditions imposed by the investors

A way to get access to the investors’ contacts and resources

A loan that you can prepay at a low cost if things go well

A source of strategic planning, management and recruiting assistance

An end in itself; rather it is just the beginning of the relationship

A way to get help raising funds in the future A guarantee that the free market will reward the business and investors

Money that does not have to be paid back by the entrepreneur if the business fails

Available unless the investors can see a way toliquidate their investment in 5-7 years.

Investment looking for a “liquidity event” so investorscan cash out

Right for entrepreneurs who want to keep ownershipand control indefinitely

HOW VC FIRMS SELECT INVESTMENTS Being highly selective. Seek companies with innovative products and “unfair”

advantages in large, ripe markets. Back outstanding management teams. Invest in companies with a clear and realistic exit strategy. Add value to the development of the business and play a

significant role in the ongoing management of the company. Make sure that companies have access to enough cash to

get to cash flow breakeven. Build a diverse investment portfolio.

HOW TO APPROACH VCS The best way to be successful in approaching venture

investors is to offer them a well-constructed investment opportunity that meets their goals and objectives. The easier it is for the investor to see how attractive the opportunity is, the more likely he or she is to invest.

Executive Summary, backed up by Business Plan

BUSINESS PLAN SHOULD COVER FOLLOWING POINTS WHILE PRESENTING TO VC’S

The mission of the business and the objectives of the management team;

A description of the product or service, its history, and an explanation of what problem it solves or what is unique or exciting about it;

Objectives of any ongoing research and development activities; The ownership structure and capitalization; The amount of investment needed and what it will be used for; A description of the market and the competition, and where the

company fits into the market; Whether the product or service has any proprietary advantage

or other protection from competition; A description of the industry, its growth trends, prospects, and

its major challenges;

DIFFERENT STEPS IN PRIVATE EQUITY INVESTMENT PROCESS

• Entrepreneur – a) Appoint Advisors b) Prepare Business Plan c) Approaching PE Firm• PE Firm – Review Business Plan

• Entrepreneur- Provide additional Information• Entrepreneur and PE firm- Meet to discuss business plan, Build Relationship, Negotiate outline terms • PE Firm- Conduct initial enquiries, Value the business, Consider Financing Structure,

Due Diligence • Entrepreneur and PE Firm – Liaise with accountants, Liaise with other external consultants, • PE Firm- Initiate External Due Diligence

The operations plan with an explanation of challenges, solutions, and strategic relationships;

The marketing and sales strategy, with the names and size of principal customers;

The organizational chart, with track records, compensation packages, and resumes of key management and board members, and hiring plans for unfilled positions;

The historical financial data, along with financial objectives and projections, with assumptions, showing cash flow needs of the business and how they will be met; and

A discussion of exit opportunities and strategies.

DIFFERENT STEPS IN PRIVATE EQUITY INVESTMENT PROCESS

Final Negotiation andCompletion • Entrepreneur-Disclose all relevant business Information.

• Entrepreneur and PE Fund- Negotiate financial terms, Document constitution and voting rights.• PE Fund – Draw up completion documents.

Monitoring • Entrepreneur- Provide periodic management accounts, Communicate regularly with investors.• PE Fund- Seat on board, Monitor investment, Constructive input, Involvement in major decisions.

EXIT • PE Fund – Evaluate and Decide to exit or to continue

CONCLUSION Before you approach a VC for funding, examine your

goals. Do your Homework Know your ultimate business objectives, and be honest

about those goals with your prospective investors.