Guide To Understanding Private Equity Transactions
By admin
Private equity firms invest in companies that are growing quickly or have the potential to grow and create value.
Business owners of companies with high profits might need money to expand, so they might choose private equity.
What Is Private Equity?
Private equity is a type of financing that involves investors providing capital to companies that are not publicly listed. It is important to note that private equity transactions can have different structures, but they all share a common characteristic – the origin of the funds used to finance the transaction.
Succinctly, private equity funds gather capital for strategic and targeted company investments. The said companies to be invested in would generally display a potential to yield a high return on investment.
Types Of Private Equity Investment
In Nigeria, private equity financing can take various forms such as acquiring a majority of shares, buyouts, venture capital, mezzanine debt financing, or growth capital.
1. Acquiring majority shares in a company
When someone acquires majority shares in a company, it means they have obtained control of a significant portion of that company’s shares. This can happen through either subscription or transfer.
2. Buyout
A buyout is a process in which a private equity investment team purchases a company’s shares or assets by using the existing team or creating a new team with the specific goal of the buyout.
3. Venture Capital
Venture Capital funds are pools of money that invest in small businesses that are just getting started, or those that are growing quickly. These businesses often have trouble finding funding from traditional sources like banks. Venture capital is especially important for start-ups that have new, risky and innovative ideas.
4. Mezzanine Debt Financing
This type of financing is also known as subordinated financing. It is designed to fit the borrower’s revenue stream, and the payment schedule is flexible to match their cash flow cycle.
5. Growth/Development Capital
This type of business financing arrangement is suitable for already established and mature businesses that are aiming for operational expansion and market diversification. It involves the business giving up a portion of its ownership to expand its operations.
Steps Involved in Private Equity Transactions
When Private Equity investors want to invest in a company, they must complete several stages of transactions.
These stages include: finding the investment opportunity, conducting research on the opportunity, negotiating the deal, closing the deal, monitoring the investment, and exiting the investment.
Read More: The Five Stages Of Growing A Small Business
Completing these stages is important for both the investor and the company to ensure that the transaction is successful.
1. Deal Origination/Sourcing Stage
The first step in private equity transactions is to find companies that match the private equity investment firm’s portfolio and goals. This is called sourcing. Once a target company is identified, the investment firm contacts the owner(s) with a proposal for an investment or buyout deal. Both parties sign a Non-Disclosure Agreement, and the target company provides the necessary information to complete the transaction.
2. Due Diligence Stage
When PE firms consider investing in a company, they need to make sure the investment is worthwhile. This is called the due diligence process, which involves investigating and verifying detailed information about the target company. The process includes looking at legal, tax, financial, compliance, and technical aspects of the potential transaction to determine if it would be a profitable investment. This can be a complex process, but it is important to ensure that the investment is sound.
3. Transaction Negotiation Stage
At this point, the investors will further discuss their interest in the company as well as how to achieve their goals. They will use the information gathered during the review process to negotiate the terms of the agreement. Once they have come to a mutual agreement, various documents, such as the Purchase Agreement, Management Agreement, Letter of Intent, and Investment Agreement, will be signed.
4. Transaction Closing Stage
At this stage, the private equity transaction is about to be completed as the parties involved put the final touch and conclude the agreement. This involves signing all the necessary agreements either through a private equity fund or Private Placement.
A private equity fund is an investment scheme that focuses on various unlisted companies with different acquisition strategies. Private equity firms can also use Private Placements to offer ownership stakes in acquired companies to select individuals with expertise and investment preferences in specific sectors.
5. Post-Acquisition Monitoring Stage
Post-acquisition of the target company, the private equity firm will implement a comprehensive monitoring framework to assess its operational efficiency and financial performance. This framework includes various strategies such as corporate governance, internal audit, and financial reporting to facilitate the growth and improvement of the business.
6. Exit Stage
Private equity firms usually seek to create value and optimise their investments over a few years. Once the company has matured and become established, the firm will begin the process of selling its stake, which is a crucial part of the PE transaction.
This exit strategy can take the form of an initial public offering, a trade sale, or a share repurchase or buy-back. The proceeds from the sale will then be distributed among the investors and other relevant parties.
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