Sunday, September 29, 2013
Saturday, September 28, 2013
Private equity firms pool money from investors to buy companies they consider undervalued. Investors include financial institutions, pension funds, foundations, endowments and sovereign wealth funds. According to the industry trade group Private Equity Growth Capital Council, in 2009 private equity firms invested mainly in five industries: business services, consumer products, health care, industrial services and information technology. You can raise money from private equity funds by finding a fit between your business plan and a fund's investment criteria.
- Prepare a professional business plan that will convince investors that you understand the business environment. It should contain detailed market analysis, an overview of the competitive dynamics of the market, including the strengths and weaknesses of the main competitors, realistic financial projections and basic human-resource planning. The business plan should also highlight risks so that an investor has the complete picture.
- Know the private equity fund's investment criteria. The most important criterion is usually the management team's background and experience. A professional business plan is not worth much unless the people behind it have a track record. Try to convince prestigious, influential and knowledgeable people (e.g., successful businessmen, academics) to join your board of directors or sign on as consultants.
- Convince potential investors that you have the competence and perseverance to succeed. You must build confidence that you are up to the challenge of managing and growing a new business venture. Investors also look for sound internal business processes, including financial reporting and management control. Prepare an appendix to your business plan or a separate presentation summarizing these internal processes.
- Look close to home for funds. Some of the more established private equity funds and institutional investors do not normally invest in startup companies. Talk to someone you know, such as a family member or an angel investor, who may be able to get you started. Angel investors are generally wealthy individuals who independently invest in attractive business opportunities. Your local chamber of commerce may have a list of angel investors in your area.
- Be flexible in negotiating the final deal. The investor may insist on certain rights and restrictions in order to mitigate risk. However, make sure that these covenants do not hamper your ability to run the business independently.
- Due diligence is part of proper investment risk management. Therefore, be open to suggestions. You should also do your own due diligence on potential investors because you could be working with them for a long time. Question the long-term commitment of investors who make promises before asking tough questions.
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When considering whether you'd like to start your own private equity company, keep in mind that you'll need to provide most of the startup capital; only a small amount should come from outside lenders. Private equity companies have steadily grown in popularity since the 1970s. You'll also need to be familiar with management buy-ins and buyouts. Your private equity company will be competing with other financial institutions that provide assistance, such as banks. Private equity companies make investments in private companies or they buy out public companies.
- Write up a business plan, which will help guide you through the setup process of your company and will allow you to keep your goals in focus. You'll also need to show potential lenders your business plan, so make sure to be thorough. In your financial information, include an executive summary, company details, your mission and vision, services, management details and financial forecast. Include cash flow and sales information, plus projected loss or profits.
- Seek out investors who are willing to invest their money for a long period of time. Some may be willing to invest large sums of money.
- Find a location for the company. Leasing a building instead of purchasing one can be more cost-effective.
- Apply for a business license. There are different business licenses for different types of companies. Contact your local business department for specific details on the paperwork that you'll need to fill out for the private equity company.
- Market the business, particularly by using the Internet. Create a website for the business. If you're not familiar with computer technology, you can hire somebody to build the website for you. Have business cards printed and hand them out to friends and family, asking them to pass them along to the people they converse with day to day. You also can distribute your business cards to local vendors.
- You'll want to set up a procedure for screening clients, since not every client who comes in search of your services will be good for business. You'll want clients who will be able to repay the money that they owe. Screen them first to minimize your own losses.
- Private equity companies often perform leverage buyouts, or LBOs. In a leveraged buyout, a large amount of debt buys a large purchase, such as a flailing company. The private equity company tries to improve the finances of the company and resells it to another firm.
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Private equity funds have gained great popularity as alternative investment funds over the recent past. The main idea behind private equity is to pool capital and use it to buy out companies, turn them private and make them more profitable by active management that private ownership allows. Private equity offers higher returns than traditional investments in stocks and bonds, but is also characterized by higher risks.
- Review your potential investment options in private equity funds. Many funds deal with customers who are able and willing to provide at least $250,000, which makes it accessible only to wealthy individuals. However, average investors can still invest in private equity exchange-traded funds (ETFs)---you can buy them through a wide range of brokers who offer such services.
- Analyze private equity funds that are available to you. Look at their historical returns. Remember, however, that past performance is not a guarantee of future success, as the fund's high returns may have been caused by pure luck rather than management's skills.Carefully review the strategy that the fund is using. Is it sustainable? if you cannot understand how the fund makes money, you better not invest in it.
- Invest in the funds you think are most profitable and fit your investing style. Risk and returns are often linked and you should try to maximize returns without increasing your risks (it is easier said than done, of course). Diversify. Don't put all your money in one fund, but spread your investments around. If you diversify, even if one ETF will underperform and lose money, another one may be able offset your loss with a profit.
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Private equity refers to the equity ownership of privately held companies. The common stock of public companies is traded on exchanges, whereas private companies have no active market for their stock and are illiquid investments. Private equity funds are investment companies built for the sole purpose of acquiring other companies and returning their profits to the senior corporation for the benefit of its investors.
- Establish the partnership. All private equity funds are structured as partnerships. The general partner operates the fund. Limited, or silent, partners are investors who have no management in the fund and simply provide investment dollars. A qualified business attorney should draft the partnership and fund offering agreements.
- Define the investment guidelines. All investment funds have specific investment objectives, even funds that buy private companies. Some funds focus on specific industries such as technology or health care; other funds use other criteria such as sales revenue or geographic location.
- Gather funds from investors. Without investors bringing money into the fund, there is no capital to start the fund with. Typically, the minimum investment into private equity funds is $250,000 or more. Financial advisers always encourage their clients to diversify their investments and typically wouldn't want more than 20 percent of their clients' assets in one fund or asset class. Because of this, private equity fund investors typically have more than a million dollars of liquid assets and are sophisticated investors.
- Make acquisitions. With clients' money in hand to invest, the fund now must acquire companies for its portfolio. Business brokers and exit planning advisers can provide good leads for companies looking to be bought out.
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