SA Private Equity Blog

Crowdfunding winners an opportunity for Private Equity firms

noreply@blogger.com (ben) — Sun, 05 Aug 2012 14:26:00 +0000

Around the globe crowdfunding is increasingly being seen by entrepreneurs, artists and creative types to be the new black as far as business finance is concerned. Weather you have a business plan or not, finding start-up funding today is no longer the dreaded journey that puts many of starting in the first place.

Brought about by the lack of bank finance in recent years and spurred on by the successes of entrepreneurs line Mechanical-watch restoration expert Leo Padron who nurtured a dream to sell a timepiece of his own design but had little inkling of how he'd raise the money for it.

Jess Fleming from http://www.twincities.com writes:
Then the Minneapolis man heard about "crowd funding," which is exactly what it sounds like: a funding appeal to the masses, with modest cash donations from hundreds or thousands of "backers" adding up to big bucks.

For his crowd-funding campaign, Padron used Kickstarter. It is one of several online services for hosting such efforts and giving them the visibility they need to draw pledges from those who like what they see.

Roughly half of such Kickstarter campaigns fall short of predetermined cash objectives by set deadlines. When that happens, the campaigns are classified as failed, the pledges are nullified, and campaign organizers walk away with nothing.

Padron's Kickstarter worked.

The Venezuela native asked for $20,000 during his two-month campaign and got $98,022 in pledges from 264 supporters for the "Vuelta," a "reboot of the gentleman's mechanical-wind timepiece" with a waterproof leather strap and a transparent bottom for watching the internal mechanism in motion. ("Vuelta" means "turn" or "turnaround" in Spanish.)

In fact, Padron met his funding goal in two days, assuring him money -- minus the 5-percent Kickstarter cut for successful campaigns -- regardless of what happened afterward. His campaign didn't become a superstar pulling in millions (as a number of others have), but Padron is thrilled.

"I am humbled," said the watch expert, who notes that feedback from his Kickstarter backers have led him to make Vuelta-design improvements. The watch, in two variations, ships later this year.

Though tech-related crowd-funding pitches often get the most publicity, these run the gamut from food-related, fine-arts and publishing efforts to scientific research, disaster relief and grassroots journalism.

Those contributing to such campaigns are typically moved to do so because they admire the projects, and because the campaigns offer perks or incentives that give backers an elite status.

Such incentives get pricier, fancier or just-plain-cooler the more moolah is contributed. The designer of a tech gadget might offer samples of the device to those contributing the largest sums of money, for instance, but only a Web thank-you or a T-shirt to those chipping in small amounts.

On Kickstarter, the service approves which campaigns can go forward, and about 75 percent do. The campaign creators set the dollar targets -- a decision fraught with uncertainty and angst since it can be anyone's guess whether the amounts ultimately prove too steep for success.

WILLING TO PAY

Kickstarter is the best-known crowd-funding site, but other such services are getting visibility as this style of fundraising hits the mainstream.

When an elderly Greece, N.Y., school-bus monitor recently became famous for being taunted by children, with the incident shown on a Web video that went viral, a campaign via Kickstarter rival Indiegogo raised more than $700,000 to allow the woman to retire.

Indiegogo differs from Kickstarter in that campaign creators get whatever amount is pledged.

St. Paul chiropractor Susan Clarke had raised less than $3,000 on Indiegogo as of last week to self-publish her book, "Clarke's Dictionary of Transactional Analysis."

This is far short of her goal to raise $15,000, but it puts her in a better financial position than an earlier Kickstarter campaign that didn't hit its $30,000 target and therefore yielded her nary a dime. What's more, an out-of-the-blue order for 20 copies of the book got her an extra $1,400.

Clarke credits her crowd-funding visibility for this: "There's potential there for finding people in your niche who are willing to pay."

Figuring out why some crowd-funding campaigns succeed and others fall flat can be difficult.

An in-development iPhone game called "Bumpin' Uglies" got star billing on major technology sites like Mashable yet fell far short of its $65,000 goal. (Twin Cities developers are forging ahead with the project regardless.)

Yet, virtually unknown developer Don James of Burnsville was successful in a recent campaign (following an earlier, failed effort), raising $1,023 for his "Core of Innocence" adventure game for the PC, with a goal of $400. He'll use the cash to get hardware and software for his team.

Elements of successful Kickstarter campaigns include doggedness, creativity and chutzpah.

A RABBI INVENTOR

Saying "no" to Moshe Weiss, an irrepressible, infectiously enthusiastic St. Paul rabbi, would seem impossible. But Weiss' first Kickstarter campaign, focused on an iPad audio accessory dubbed the SoundBender, fell far short of its $7,500 target in late 2011.

So, Weiss just tried again.

For his second Kickstarter campaign, also focused on the clip-on plastic doodad that amplifies the sound coming out of an iPad speaker, he knocked his goal down to $4,500 and increased the campaign's duration from four to six weeks. He also lavished more attention on the design of his Kickstarter page.

And if donors canceled their pledges, Weiss would chase them down and ask them to please, please reconsider. "What's up?" he'd say. "I want you back. What can I do to get you back?" A majority of the dropouts re-pledged, he said.

"Kickstarter is an amazing experience -- if you utilize it properly," Weiss said. "It is amazing the connections you build with people. Your backers become your friends."

Weiss is in the thick of a third Kickstarter campaign to fund a revised SoundBender tailored to the third-generation iPad but, as of last week, had already exceeded his $4,500 funding goal.

Weiss also has completed a couple of successful campaigns via crowd-sourcing site Kicktraq.

IT'S A JOKE, BUT...

April Fool's Day is traditionally replete with gag announcements from tech companies about products and services that will never see the light of day ... except sometimes they eventually do via crowd-funding campaigns.

The Littlest Black Book from Minneapolis-based Pad & Quill is one such product. It's a device case that looks like a fine leather-bound book when closed. But, unlike other P & Q cases that protect such large gadgets as the iPad and the MacBook Air, the Littlest Black Book encases Apple's super-small iPod Nano music player.

"It was, at first, a total farce," said Pad & Quill founder Brian Holmes, who initially made only a handful of the things for giggles. "I did not know if anybody would want to buy a case like this, but let's make a video, let's make it funny and put it up on Kickstarter" to see what happens.

The month-long campaign, launched March 31, asked for $4,500 and got $7,211.

The Littlest Black Book is now available for $34.99. It's hardly one of the company's leading sellers, Holmes said, but it has been priceless for publicity. He has Kickstarter to thank for that.

Julio Ojeda-Zapata writes about consumer technology. Read him: twincities.com/techtestdrive and yourtechweblog.com. Reach him: jojeda@pioneerpress.com or 651-228-5467. Follow him: ojezap.com/social

LOCAL EXAMPLES OF KICKSTARTER SUCCESSES

FILM

What: "Death to Prom," which producer/cinematographer Jeremy Wilker calls a "gay, teen romantic promedy. Think 'Pretty in Pink,' but the main character is dead."

Why Kickstarter: This is the second successful Kickstarter I've done. The first was in October 2009 for "Triumph 67." We were going for $10,000 and raised $12,000, so we felt confident we could do it again.

Amount: With more awareness of our crowd-funding and our track record, we figured we could go for $45,000. To be honest, it came down to the last minute, but we pulled it off. That was the amount we needed to start shooting, not the whole budget. On "Triumph," no one got paid, so it was important to me, probably more than to anyone else, that we pay people. I want people to be able to make a living making films here, and I felt like on some level I wanted to prove myself and give back by paying people a decent wage.

Incentives: Every contributor gets his or her name in the credits, which will be long because we had 400-some donors. One thing we put in there that I thought was a funny, goofy thing was giving away two walk-on roles. We put that at the $1,500 level, thinking no one would pay that, but those two went really fast. I thought, "Dang, I should have cast the whole film that way. Make people pay to work with me." We've also given away some of the wardrobe -- there's a lot of fashion in the film. Most people do a poster or DVD -- we did on the first one. But that ends up costing a lot of money, and if you can personalize something to the project, it is a deeper connection than if it's just merch.

Experience: I would do it again. I've done it twice, so I'm not going to be able to go back to that well too soon. I think I'll have to wait a year so. I don't wear out our welcome. You can't constantly be doing Kickstarter, begging people for money, I don't think.

-- Chris Hewitt

DOCUMENTARY

What: Dawn Mikkelson says her documentary, which has the working title, "Smooch," "tells the stories of people from around the world who have forgiven the unforgiveable." The Kickstarter campaign was to pay for our crew to go to Cambodia in the fall to tell the story of Kilong Ung, a survivor of the Khmer Rouge genocide. He lost many family members and was a slave laborer as an adolescent. He escaped to the U.S. as a teen and then, as an adult, returned to Cambodia to visit family. On that trip, he had the opportunity to kill a former Khmer Rouge leader but he turned that into an opportunity to forgive, instead."

Why Kickstarter: For me, raising money at this stage has always been about community support, in the form of fundraising events, potlucks, etc. This is the time to build the base around a project, as these are the people who really care about what you're doing. Historically, these have always been in-person events, so the online component was new and exciting. I had monitored the success of similar campaigns for a while and felt like we had a good chance of reaching our goal. We chose Kickstarter over IndieGogo because the all-or-nothing element of Kickstarter helps reassure donors that their donation will go toward the actual project.

Amount: Our goal was $10,000 and we raised $12,981. I was surprised we passed our goal by almost $3,000. I think that has something to do with momentum. People want to be a part of something exciting, part of a larger community or movement, and this is a great way to do just that.

Incentives: From listing donors' names on our imdb.com page (the smallest incentive) to a private screening with the director at the venue of your choosing in the continental United States. The more popular incentives were signed copies of a book written by Kilong Ung and digital downloads of the film upon its completion. That said, the No. 1 and No. 2 incentives were the IMDB listing and no reward at all. No. 1 was probably because it was the lowest amount to donate ($5 per person) and "no reward" was often, but not always, friends and family that just wanted to support us.

Experience: It was a great experience and I would absolutely do it again. There are things I would do differently, but for the most part, it was an exciting experience that reminded me of the power of community.

-- Chris Hewitt

ART

What: Franconia Sculpture Park used Kickstarter this summer to raise funds to help create a permanent tribute to artist Michael Richards. Richards was a guest artist at the park in 2000 and while there created "Are You Down?," a multilayered sculpture meant to raise awareness of the Tuskegee Airmen, a group of African-American pilots who fought in World War II. A year later, the New York-based artist died in the Sept. 11, 2001, attacks while working in his studio in the World Trade Center. "Are You Down?" originally was made from fiberglass resin and recently recast in bronze. Franconia wanted funds to reinstall and create an intimate space for the piece for a Sept. 11, 2012, dedication.

Why Kickstarter: After failing to get funds for the project from other outlets, Franconia founder and CEO John Hock turned to Kickstarter. The site had been on his radar for a while and he believed "Are You There?" was a good project to test the water. "We had three or four projects we had been considering doing Kickstarter with, but this was on the front burner," says Hock.

Amount: Franconia wanted to raise $13,980 and ended up getting $14,603 from 94 backers. Twenty-four hours before the deadline, "Are You Down?" was thousands of dollars away from reaching its goal, which made Holt a little nervous. At the last minute, he reached out to some folks asking them to donate to the project. "In the last 24 hours, there were some phone calls made," says Holt. "If you don't hit the goal, you don't get the money, and a lot of people just wait to see what happens. My backup plan was I was just going to put it on the Franconia credit card."

Incentives: Holt offered a variety of incentives, including bumper stickers, private tours and miniature bronze "Are You There?" figures.

Experience: "Because it was Michael Richards, people who don't normally give to Franconia gave to this," says Holt. "It was access to new people. You're only limited in who you can get the word out to. We were networking with a bunch of organizations in New York City, Chicago and locally. We also announced it through our newsletter and on Facebook and Twitter.

While Holt isn't thrilled with the cut that Kickstarter takes, he said Franconia will use the site again. "I think to get people's attention it has to be something noble and exciting that is almost impossible to find funding for elsewhere," says Holt about what kind of project is a good fit for Kickstarter. "I don't think I'd do it to buy new refrigerators for the Sculpture Park."

-- Amy Carlson Gustafson

MUSIC

What: St. Paul singer/songwriter Johnny Solomon's band Communist Daughter has used Kickstarter twice. Last year, the group's (now former) manager set up a project to raise money to put Communist Daughter on the road. More recently, a production team launched a campaign to pay for a music video for the group's new single "Ghosts."

"The band didn't have control over the specifics (of the first one)," Solomon said. "We let someone else put it together, and then we were left with the ball. I was perturbed about how convoluted it got. But it was our mistake not to be the ones in direct charge of it from the beginning." In the end, the money raised did help the group on several fronts, including the release of an EP, but Solomon ended up signing on with a new manager.

The video project, however, ran much more smoothly, although the band wasn't directly involved. "We were watching from the outside," he said. "We gave them permission (to use our name), and we helped get the word out. We're also going back and making sure everybody got their awards packages, too."

Why Kickstarter: "The one thing I like about it is that it's a new revenue stream at a time when there are so many revenue streams being cut off," Solomon said. "I really appreciated seeing how many people were willing to spend the money and who didn't care what the rewards were."

Amount: The band pulled in more than $8,000, while the video production team raised about $3,000.

Incentives: For the band's own Kickstarter project, it offered a series of posters, CDs, vinyl and concert tickets. Two folks contributed $500 and earned a year's worth of free admission to the band's concerts and a box filled with merchandise. The video shoot awarded many of the same items, with one $1,000 backer earning a "co-executive producer" title in the credits.

Experience: If Solomon does another fundraising project, he said he's likely to use Rockethub, a service similar to Kickstarter that's more focused on promotion, not just collecting money. "Kickstarter is really popular," he said, "but getting noticed on it is getting harder. Not that Kickstarter did anything wrong, I just think Rockethub has a better format."

-- Ross Raihala

TECHNOLOGY

What: Elija Parker of Pine Island, Minn., wanted to raise funds for the Timelapse+, a timer device for triggering SLR cameras without direct user intervention. It automates certain sorts of camera work, such as time-lapse photography.

"It can tell the camera to take a picture every three seconds for three hours," Parker said. "It is designed to work with any camera that has a remote shutter port; that's most SLRs and some advanced point-and-shoots."

Why Kickstarter: "It was low-risk for me and reasonably low-risk for my backers," Parker said. "I didn't have to spend $20,000 of my own money."

Amount: "I figured I could just barely break even if I sold $20,000 worth of orders to cover my upfront costs," Parker said. "My goal was to put the amount as low as possible to come out at zero (in the end). It was worth a try. A mention on Engadget.com brought in $15,000 overnight and basically gave my project a jump-start. By the third day, I had exceeded my goal, which really blew me away. Every time I refreshed the screen, the amount was higher. I really connected with the backers. They believed in the project and contributed ideas before it was completed. It's really a collaboration."

The campaign raised $165,730 from 1,248 backers in six weeks.

Incentives: These ranged from website thank-yous in exchange for $1 pledges to various versions of the Timelapse+, with or without add-on accessories, for pledges between $99 and $299.

Experience: "This has opened a lot of doors for me. I have other Kickstarter ideas," Parker said. "It's inspiring ... and I'd love to do it again."

-- Julio Ojeda-Zapata

RESTAURANT

What: Cynthia Gerdes, owner of Angel Food Bakery above Hell's Kitchen restaurant in Minneapolis, turned to Kickstarter to buy a "mega oven" for the bakery and add delivery and online ordering.

Why Kickstarter: "Everything they did was spot on, I felt very comfortable using their systems from A to Z," Gerdes said. The other really cool thing about Kickstarter is it gives you a chance to personally connect with people. A lot of them had questions. It really generated excitement for us. They have no idea that we have surprises down the pike for them. We will almost treat them as investors. We will be taking great care of them."

Amount: Gerdes was looking to raise less than $8,000 but hit that mark within 48 hours and told people not to stop giving because she would use additional money to add delivery and online ordering. In the end, the project raised more than $18,000.

Incentives: Baked goods, including doughnuts shaped like the letters in "Happy Birthday." For a $100 pledge, a backer could reserve one of the bakery's seven seats once a month for a year and receive all the baked goods they could eat during that sitting.

Experience: While Gerdes had a positive experience with Kickstarter, she offered this piece of advice for anyone thinking of funding a similar project: "I would warn people that it takes an inordinate amount of time to take care of those backers who so kindly fronted us some money. It took us well over 100 hours to make sure our 350 backers were taken care of."

In South Africa also today this new form of funding is taking hold. With crowdfunding being introduced to the country by the already well known, StartMe crowdfunding platform, entrepreneur, artists and creative spirits are embracing the opportunity of sourcing finance from the crowd. It will be down to you and I to ensure that these businesses find the finance they need by becoming part of the crowd who provides funding.

Private equity for New Entrepreneurs

noreply@blogger.com (ben) — Wed, 06 Apr 2011 13:43:00 +0000

Private equity is often something associated with larger businesses and especially takeovers, mainly due to the press these types of business finance activities often get. But new entrepreneur looking for small business finance for their business plan will be surprised to know that there is plenty of activity and support in the market for them.

Private equity funds differ in their areas of specialisation, their shareholders and their management structures. The source of a private equity fund can affect the structure of the deal offered, can determine whether the fund manager can make a rapid investment decision or not and even have an impact on the continuity of the people you deal with and their management style once the capital is invested.

Independent private equity funds are those in which third parties are the main source of capital and in which no one shareholder holds a majority stake. An independent fund is the most common type of private equity fund.

Captive funds are those in which one shareholder contributes most of the capital, i.e. where the parent organisation allocates money to the fund from its own internal sources. Captive funds can be subsidiaries of or departments in a bank, a financial institution, an insurance company or an industrial company. So-called corporate or industrial funds are launched by companies looking to invest in sectors relevant to their core activities and to identify new technologies. This can also be the case for banks that want to separate their role as a commercial banker from their role as an investor.

Semi-captive funds are funds in which, although the main shareholder contributes a large part of the capital, a significant share of the capital is raised from third parties. Semi-captive funds can be subsidiaries of a financial institution, an insurance company or an industrial company that operate as an independent company (certain corporate funds fall into this category). (12)

For captive and semi-captive funds as a compensation for less independence for the management company, the parent company assumes most, if not all of the responsibility for finding the capital required for the investments.

Some funds come from the public sector. Their capital comes mainly or totally, directly or indirectly, from public bodies.
5.1. How do private equity investment funds work?

The legal structures relating to private equity investment funds vary from country to country but there are two main types: funds with a limited lifespan, in general ten years, and funds with an unlimited lifespan.

The former is the most common, based around a partnership agreement between the institutional investors and the investment fund management team. The most frequent legal structures used are the Anglo-Saxon Limited Partnership, the FCPR (Fonds Commun de Placement à Risques) in France and other similar forms such as the SICAR (Luxembourg), the Private PRICAF (Belgium) or the Italian Fondo Chiuso. The fund managers (GPs) have unlimited liability for the investment whilst the institutional investors (LPs) are liable only for the amount of capital they have provided and do not play an active role in the management of the investments.

The management team (usually fairly small – on average between six and eight managers) draws down the funds in blocks of cash as and when they need the capital for their investments. To cover operating costs, a management contract is usually drawn up allowing for fees of around 1.5% to 2% of the capital raised to be deducted in advance from the investors’ commitments.

The fund managers are in effect themselves entrepreneurs involved throughout the lifespan of the fund. They check that their management company is running in a balanced fashion.

On exit from an investment (i.e. divestment), the amount recovered is usually not reinvested but redistributed to the capital providers. The institutional investors receive the first part of the profit, and an agreed target rate of return or “hurdle rate” (13), as a reward for tying up their capital over the lifespan of the investments.

If there is a surplus profit above the hurdle rate, this is shared between the fund managers and the other investors. While the fund managers are usually entitled to 20% of this capital gain, the LPs will receive the remaining 80%. This 20% of the profit above the hurdle rate is called “carried interest” or “carry”.

After ten years (sometimes an extension to twelve years is granted), all the investment in the portfolio must be divested and the investment fund must be closed.

The overall performance of the fund and its management team is assessed by calculating the internal rate of return (IRR), the net difference between the capital invested and the money reimbursed to investors. This rate depends not only on the amount returned but also on the length of time for which each block of capital was tied up.

Funds with an unlimited lifespan do not operate with the same time constraints as the funds described above. However, the managers also come together in a management company and manage their investments under the same conditions. In the past few years, these managers have been rewarded in the same way as their counterparts described above. They usually reinvest part of the realised capital gains into the fund.

Fund specialisations

Fewer and fewer funds are purely generalist (i.e. with no sector or business type specialisation) and the majority of private equity funds have decided to specialise in certain industrial sectors or services or in companies at a certain stage of development, of a particular size or with a specific geographical coverage (regional, national or international).
5.2. The different stages of a company’s development

Funds can vary widely depending on the different stages in a company’s life cycle, which can be defined along the following lines, keeping in mind that the boundaries between the different stages can be blurred.

Seed

Seed financing is designed to research, assess and develop an idea or initial concept before a company has reached the start-up phase.

At this stage, investors are mainly business angels. They are often entrepreneurs or former directors who join a project to help get it off the ground and contribute some of their personal funds. Recently, there has been an increase in the number of business angels.

Though it is rare for specialised financial operators to contribute capital to such ventures, there are some “seed” experts. This “seed money” accounted for 0.3% of the total capital invested in 2006 by the European private equity and venture capital industry (14).

Start-up

Start-up financing is used for product development and initial marketing. Businesses may still be in the creation phase or have just started operations and have not yet sold their product commercially.

When the product has taken shape, forming the basis of a real “business plan”, a certain number of venture capital professionals will join the entrepreneur and assist him with setting up the business.

At this stage, the capital is mainly required for research and development of the product and to train personnel. This is especially true in technology sectors such as electronics, IT, life sciences or biotechnology.

The risk of failure for these companies is high and investors need to be stringent in their choice of projects.

Post-creation

At this stage, the business has already developed its product and needs capital to begin making and selling it. It has not yet generated any profits.

Expansion/Development

In the case of expansion, the business has reached or is approaching breakeven. This is a period of high growth and capital is used to increase production capacity and sales power, to develop new products, finance acquisitions and/or increase the working capital of the business.

Getting through this period often requires many rounds of financing, during which the company has to ensure that its growth is balanced. Professional investors are most attracted if a significant amount has already been invested in a company, if the company already has a history of development and if it is already operating with a robust structure in place.

This stage includes bridge financing (15) and rescue or turnaround (16) investments.

Transfer/Succession

The total or partial retirement of the head of a company is often an opportunity to implement a leveraged operation (capital contributions in the form of both debt and equity) to undertake a buyout or a buyin. These can also happen when a large company disposes of a business unit, or when shares held by family members are repurchased or, eventually, when investors from previous stages of development exit the business.

The existing management team (in the case of a buyout) or a new team (in the case of a buyin), assisted by financial investors, creates and finances a holding company that then borrows debt to acquire the target company. The dividends produced by the target company then enable the holding company to repay its debt. The structure of this operation means that it applies only to an established company or business unit, with a positive and/or predictable cash flow.

Buyouts (or buyins) allow a company to carry on trading, facilitate generational change at the top of a company, enable restructuring more efficiently by injecting fresh capital and protect jobs whilst safeguarding employees’ shareholdings. The contribution of the private equity investors is not simply financial: they support the company management by bringing in their knowledge of the industrial sector, their network of contacts and their long-term commitment. The amounts invested are typically substantial and big investment funds have specialised in these operations for many years.
5.3. Investment size: majority versus minority investments

The size of investment is often linked to the company’s stage of development. Private equity investors often take a substantial share in very young companies because they supply capital that is very difficult to raise from traditional sources (such as banks) and because they are heavily involved in setting up the operation. Very young companies require great assistance because the head of the company has to divide his time between product development and more general management. Here, the support of private equity investors is very important. However, the amounts invested are smaller than in development or subsequent stages.

During buyouts, private equity investors are also often majority stakeholders in the companies. However, they can be minority stakeholders during the development stage if the company is already active and is looking for capital to “complete” its development.

But regardless of the size of the initial stake, agreements often allow for equity to be returned to the investee company managers or entrepreneurs when they have achieved certain objectives. In this way, the private equity investor can move from being a majority stakeholder to holding a minority stake.
5.4. The size of the investee company

Contrary to commonly held beliefs, private equity is very active in small and medium-sized enterprises. In 2006, 89% of the private equity backed companies in Europe had fewer than 500 employees and over 70% had less than 100 employees.

The biggest operations (in companies with over 1,000 employees) represented less than 9% of the total number of investments in 2006 but accounted for 49% of the total European capital invested (17).
Over the past five years (2002-2006), over €90bn has been invested in companies with more than 1,000 employees, across 1,854 operations. While this represents 42.9% of the total European amount invested in that period (€212bn), it accounts for only 3.5% of the total number of investments (52,512) (18).

5.5. Sectors

Sector specialisation allows investors to make better evaluations of a business. The entrepreneur is able to deal with a specialist in his sector with whom he can share his strategic thoughts.

In 2006 the sectors that attracted the highest interest from private equity in Europe (in terms of amount invested) were consumer-related and non-industrial or financial services, together accounting for over 30% of investment, followed by communications, healthcare (including medical) and computer-related. The largest number of investments were made in computer-related, healthcare and consumer-related companies (19).
5.6. Geographical scope of investments

In 2006, €67.7 billion or 95% of the total European amount invested went to companies that were based in Europe.

85% of the total number of investments were made in the country where the fund is based, 10% were invested in other European countries and 5% outside of Europe (20).

Being close to the business allows for a better relationship. This is particularly true for financing operations during the early stages. In big operations or when the operation is syndicated between several investors or when the business is more mature, geographical proximity is less important.

(12) In 2006, independents provided two-thirds of the total European amount invested and captive funds invested €12.5 billion or 17.6% of the total investment amount. Semi-captives invested €10.4 billion, representing 14.6% of the European total. Source: EVCA Yearbook 2007 – Annual Survey of Pan-European Private Equity & Venture Capital Activity.
(13) The hurdle rate is a rate of return that must be achieved before a manager becomes entitled to carried interest payments from a fund.
(14) Source: EVCA Yearbook 2007 – Annual Survey of Pan-European Private Equity & Venture Capital Activity.
(15) Financing made available to a company in the period of transition from being privately owned to being publicly quoted.
(16) Financing made available to an existing business which has experienced trading difficulties, with a view to re-establishing prosperity.
(17) Source: EVCA Yearbook 2007 – Annual Survey of Pan-European Private Equity & Venture Capital Activity.
(18) Sources: EVCA Yearbooks 2003-2007.
(19) Source: EVCA Yearbook 2007 – Annual Survey of Pan-European Private Equity & Venture Capital Activity.
(20) Source: EVCA Yearbook 2007 – Annual Survey of Pan-European Private Equity & Venture Capital Activity.

Alternative medicine draws private equity investment

noreply@blogger.com (ben) — Thu, 24 Mar 2011 12:58:00 +0000

Business finance and its availability to the right investment opportunities are healthy in South Africa as evident from a string of recent Private equity investments in the pharmaceutical industry. In recent months, two local private equity firms have made large investments in this lucrative market — one in complementary and alternative medicines and the other in the generic HIV/Aids drugs market.

Investment opportunities in business plans from a wide variety of industries have been attracting interest from investors looking fro high returns on their money. Businesses both large and small have been on the receiving end of this phenomenon and the trend sees no signs of slowing down any time soon.

The alternative medicines market in SA has an annual turnover of R3,5bn , according to the Vitamins & Dietary Supplements Report.

For private equity company Coast2Coast, the acquisition of homeopathic company Natura, as well as Bioter Health and its sister company Consulting Microbiological Laboratory (CML), is part of a strategy to build and list a branded consumer goods company with annual after-tax earnings of R100m by 2011.

Coast2Coast subsidiary Bounty Brands expects to generate about 40% of its turnover through its health division .

Bioter Health and CML manufacture nutritional supplements. Their combined turnover is R50m/year.

Natura, which produces popular products like Rescue Remedy and Arnica, is projected to turn over R100m in 2010.

“The complementary and alternative medicines industry has shown significant year-on-year growth, with consumers turning more regularly to self-medication and health maintenance,” says Coast2Coast COO Cris Dillon.

The three companies acquired by Coast2Coast also supply about 400 homeopaths in SA and produce house brands for retailers.

Bounty Brands plans to become the largest complementary health products company in SA.

“This is a highly fragmented industry,” says Dillon. “There are more than 400 players, many of which are family-owned. Of these about 30 are large players.

“Consolidation in this market is inevitable, particularly as government is considering tightening regulations in this market.”

The high-growth nature of the pharmaceutical industry also drove private equity investor Capitalworks to acquire a stake in Quality Chemical Industries in Uganda. It manufactures combination therapy anti retrovirals (ARVs) and anti malarials under licence from Cipla India.

“There is a great need for high-quality, affordable ARVs in Africa,” says the fund manager for Capitalworks Partnership Fund, Beth Mandel.

The Quality Chemicals plant is one of three pharmaceutical producers in Africa to receive good manufacturing practices certification from the World Health Organisation.

As a least-developed country as defined by the UN, Uganda is exempt from the agreement on trade-related aspects of intellectual property rights .

“This allows companies based there to produce patented products without restriction ,” says Mandel .

With the recent certification from the World Health Organisation, Quality is marketing its triple-combination ARVs and anti malarials to NGOs within Uganda and beyond.

“We believe demand for these two products could keep the factory running at capacity, but there is always an opportunity to move into other, related products — to treat tuberculosis, for instance,” says Mandel.

Capitalworks Partnership Fund has other investments outside SA — in MTN Nigeria and in the Reclamation Group.

Much of the original capital raised, about R500m, has been invested in these three companies, but Capitalworks may raise more capital , Mandel says .

Similarly, Coast2Coast, which is invested in 10 companies, plans to raise R200m to add to Bounty Brands’ portfolio.

These are not the only two firms active in the market but they have been so active recently that their investments have drawn attention from entrepreneurs and business owners alike. An attractive exit strategy is a key element of most business plans and from an entrepreneurial point of view, this certainly is attractive.

How to create a private equity fund

noreply@blogger.com (ben) — Wed, 02 Mar 2011 16:13:00 +0000

Deciding how and in what to invest your money may be a challenging task with many different issues to take into consideration. Return is of course one of the first things on your mind but a number of other issues may also be important. You may want to invest first of all into a business plan of your own or the possibility exist, with great business plan templates being easy to find today, that you want to invest into someone else's business idea.

Something that is increasingly becoming more commonplace is the creation of a private equity fund from where you and others investing in the funs then choose which business opportunities to invest in further.

A private equity fund is a good way to invest your money. Though the investment is locked for 10 years or so, a private equity fund brings a good value to your investments. This is true even compared to the fact that public equity gives your investment more freedom. So if you decide to create a private equity fund, here's how you can do it:

Enter into a partnership. Take note that private equity funds are all structured in the form of a partnership. The first partner, or the general partner, is the one who will operate the fund. On the other hand, the other partner, or the investor, is the one who provides investments and has no power over managing the funds. Seek help from a business attorney to help both of you to draft the agreements of the partnership. Make sure that both parties understand every detail of the investment. Take note that this partnership may get as many members to operate granted that it falls within the private equity fund agreement.
Identify the partnership's investment guidelines. All of the investment funds must have investment objectives of their own. For instance, some investment funds can be specified for buying industries such as health care or technology only. Other funds can be defined to support buying companies in a specific region or companies with marked sales revenue.
Solicit funds. The capital of the private equity fund will only come from the funds brought in by different investors. Set a minimum investment in your private equity fund. Take note that the most common minimum investment in businesses like this is $250,000. The minimum investment can be more than this standard depending on company to company. Make sure that you collect funds from accredited investors only as defined by the Securities and Exchange Commission. It is best if you can get a list of contacts of the wealthy investors in the business scene. Or, contact different investment advisers to help you find leads for the best investors. This is true especially for investment advisers that personally work with accredited investors that are of high net worth. Acquire companies. Now that the private equity fund has money from clients, it is time to acquire new companies for the portfolio. Check out good leads to see companies that are best to be bought. Seek help from business brokers or exit planning advisers whenever possible. Other great resources in finding potential companies are CPA firms and also business attorneys.
Distribute profits. All of the defined profits of the private equity fund must be distributed to all its investors. This can be done quarterly or annually depending on the agreements drafted for the partnership. The more the profits are of the private equity fund, the more money each investor gets.

The success of your private equity fund will depend on how well you have created it. Since a lot of people can be affected by the success and failure of the firm, it is necessary that you create the firm successfully. Refer to the above-mentioned steps so you will be guided accordingly not only in the creation of the private equity fund but also in its successful operation.

Should entrepreneurs pay for introductions to investors?

noreply@blogger.com (ben) — Wed, 16 Feb 2011 16:33:00 +0000

With numerous business finance networks such as Investors Network, angels den and many more facilitating the introduction between entrepreneurs and investors the question does arise whether this 'business dating service' should be a paid for service. The charges vary of course with some business not charging much more than a 2% success fee while others choose to both have an upfront fee as well as a, up to 5% commission upon completion of the business plan being funded by the investors in question. It will be interesting to hear your views on this as there certainly are many.

Depending on the nature of the business and the opportunities some will say that the investor should pay for introduction while others are happy for the entrepreneur to show his/her commitment to the deal by paying for the introduction.

Renowned Business Angels and Venture Capitalists who created big companies don’t do that: Ask the famous business angels or famous venture capitalists from Sequoia Capital, Kleiner Perkins, Benchmark Capital etc, you do not hear that they require the entrepreneurs to pitch. Instead, they are ready to buy the entrepreneur a meal or drink and spend the time to listen to the ideas of the entrepreneurs. These are the same angels and venture capitalists who produce Google, Facebook and Twitter. None of the top notched companies pay angels to pitch their ideas. Consider another argument, entrepreneurs are trying to set up companies with limited resources and financing, and yet these groups make them pay to find investment. In fact, a lot of entrepreneurs and developers enjoyed the free Neoteny Conference organized by Joi Ito last year. The people who attended (including myself) even learned more abut term sheets and valuation. Try to make a guess how much it cost to get Joi Ito to talk about start-ups and new venture financing: Absolutely Free! and I did not add the free lunches and coffee breaks too.

Even agencies Singapore Government make it free for entrepreneurs: If you have recently watched the iMatch conference, where MDA organized entrepreneurs in Singapore to pitch in front of an international consortium, you do not hear the Singapore government will tell you to pay for pitching. In fact, they enlisted the services of the incubators in London and several business angels to help the companies to prepare their presentation for the investors. It’s probably one of the things I praised the government agencies like SPRING and MDA are doing with the iJAM and TECS schemes.

If you fail many times to get an investor, you will end up losing more money doing this: Here is a way to think about this. If you pitch your idea and the investor did not respond to you, it just means that he or she has no interest to invest in your company. Your job is to iterate from the reason to why the investor did not think that it’s a good proposition to invest in your idea. If you are serious about your start-up, you will put your own money to make it work than to spend the money to pay some middle men to get you investors who may or may not put money into your company.

I will leave the entrepreneurs to decide whether to engage with these groups. Ultimately, in the ecosystem, there must also be a natural selection to decide the weak and the strong. Perhaps, having these groups help to make that distinction.

Entrepreneurs need freedom says private equity boss

noreply@blogger.com (ben) — Mon, 31 Jan 2011 11:49:00 +0000

With entrepreneurs increasingly turning to private equity in their quest for business finance, business funders are being warned that dealing with new businesses are a entirely different game in comparison with funding the corporate sector. Entrepreneurs need freedom to implement their strategies and ideas in the entrepreneurial way. The countries economy and ongoing recovery of this depends on a more entrepreneurial way of conducting business. So from a private equity investor point of view its important that the business plan and strategies of the entrepreneurs is respected. Yes of course you can comment, make amendments and add your expertise but don't try to dominate entirely as this will end up driving entrepreneurs away.

In his recent role as boss of the private equity industry's trade body, BVCA, Kolade suffered a roasting by the Treasury Select Committee when he tried to defend the sector against accusations of entrepreneurial ventures and the greed that often may go allong with this, asset stripping and loading some of the finest names in corporate Britain with insupportable levels of debt.

Though seen as one of the 'good guys' of private equity, Kolade was turned over by the Press and public outings became tests of endurance.

Now safely back as managing partner of ISIS Equity Partners, specialising in small to mid-sized investments, Kolade is reserving his skills as an eloquent and polished speaker strictly for rather more cerebral university audiences (he is a governor of the London School of Economics).

But with the looming General Election and a sense that an incoming government will launch an emergency Budget, Kolade is venturing back into the spotlight.

'None of them seems to realise how important entrepreneurs are to this country,' he says.
'Big business isn't going to be the backbone of recovery - they employ comparatively few people and can always shift their assets overseas. It is the smaller entrepreneurial businesses that will create the jobs and the growth that we need.'

But Kolade, 43, thinks he is already seeing a queue of entrepreneurs wanting to sell up rather than expand because they fear a huge rise in capital gains tax from 18%.

The real benefits of sourcing private equity for entrepreneurs

noreply@blogger.com (ben) — Sun, 30 Jan 2011 16:59:00 +0000

More and more entrepreneurs are viewing private equity and venture capital as sources of small business finance for their business plan a recent report has found. With bank increasingly becoming more risk averse when it comes to SMEs the next best option - and in my mind a much better one as it also provides you with experience and support from entrepreneurs who have been there and done it successfully - is that of private equity, venture capital or Angel finance.

With LinkedIn recently announcing it will be the first social networking site to launch an IPO, while other venture-backed companies like social network Facebook and discount retail site Groupon have attracted heavyweight investors. One in leading entrepreneurs will be looking to private equity and venture capitalists to raise capital in 2011, according to a survey by Investec.

Forty-four per cent of those interviews say they are expecting to launch new ventures and a further 31 per cent believe it is “quite likely” that they will do this.

However, their plans could be put on hold because many still fear that access to capital could be difficult. Only six per cent expect it to be easy to raise funds during 2011.

But what are the real benefits of sourcing private equity for entrepreneurs? Theo o'Brian from http://privateequityblogger.com/ talks about hither following advantages for business owners:

Companies that are backed or acquired by private equity firms are often made more efficient and produce higher profits, which benefits now only the private equity firm but also the company.

Private equity firms use skilled management teams to correct the problems and ineffective parts of the company and many times this intervention prevents the company from further declining or even failing.

The management receives carried interest, a portion of the profits, so managers and their staff are motivated to produce good results to investors. Although carried interest is often criticized for taking money from the investors, it is a very big incentive for managers.

By definition, private equity firms work outside the public eye and do not have to follow the same transparency standards that public firms and funds must adhere to. This allows private equity firms to reform the companies without the constraint of having to report quarterly to the SEC or similar distractions.

Private equity firms generally perform very rigorous due diligence on potential investments. By utilizing a team of researchers the private equity firm is able to identify most risks that would not otherwise be found.

Private equity managers are paid very well and so it is easy to attract high calibre, experienced managers that tend to perform very well. The same goes for lower level employees at private equity firms, they tend to be the top young business school graduates.

Looking at these, its not surprising that so many business owners are opting for this solution when it comes to raising finance for their businesses and if the trend persists we may see this percentage rise even further

Private Equity in South Africa alive and well

noreply@blogger.com (ben) — Wed, 19 Jan 2011 14:56:00 +0000

With private equity in South Africa alive and well we look at some of the recent news and movement in the South African market. Recent news that Goldman Sachs has valued Facebook at $50-billion makes it tempting to look at the business plan and prospects of some of SA's innovative and successful internet ventures.

A recent Times Live article explores the opportunities and threats in the SA Private Equity market quite wonderfully:

    " 'Entrepreneurs here generally don't have deep enough pockets for the time it takes to break even' "

    * Yola, which has secured $20-million from the Luxembourg-based Reinet Fund (controlled by the Rupert family), recently signed a distribution deal with California-based IT firm Hewlett-Packard, which sells more than 60 million computers a year. A similar deal is set for early this year with AOL.

Yola was founded in 2007 by South African Vinny Lingham and is a website-building and hosting service, helping small businesses develop their online presence. In March 2008 it moved its headquarters to Silicon Valley in California but still has offices in Cape Town.

Lingham said there were no plans to list or take on a private equity partner. "We see Yola as a global business that was started in South Africa."

    * MXit is a free online mobile chat service that also provides music downloads, movie clips, sport and quizzes and facilitates obtaining quotes for travel and insurance, as well as quick access to news and weather.

MXit South Africa has been profitable since September 2006 and since then has not required any funding.

"We hope to increase revenue even more as we explore new fields such as m-commerce and wallets, and when we launch the best version of MXit ever, Version 6," said Herman Heunis, the founder and CEO of MXit who is based in Stellenbosch.

MXit International is still in an investment phase and the shareholders are Naspers (30%) and Heunis. MXit has more than 30 million registered users, many of whom are from SA.

Online travel agency Travelstart, founded in 1999, posted 30% growth in transactions in the first seven months of last year in the face of the global economic crisis.

Stephan Ekbergh runs the company he founded 11 years ago in Sweden but which is now headquartered in Cape Town.

"This is as good a place as any to run an internet company," he said.

The site has 25000 unique visitors daily and about 120000 customers are on the business's database.

Wholly owned by Ekbergh, the company's options include listing in SA or London or both, or taking on a private equity player.

Travelstart launched in Tanzania three months ago, is setting up in Kenya and has plans for Egypt and Turkey.

    * Zoopy is an online and mobile social media community that was launched in 2007. Users visit the site to upload, share and discover videos, photos and audio files.

"We thought that to have all three media in one place is a lot more beneficial," said Zoopy co-founder Gerry da Silva. YouTube, for instance, offers only video.

Zoopy has 120000 registered users and more who view the downloads. It is 75% owned by Vodacom.

"We would consider listing but not right now," said Da Silva. Users, mainly from SA, also span the US, Germany, Nigeria, India and the UK. At one stage about 40% of Zoopy's users were from the US.

Small countries (apart from Israel which has had multiple listings on Nasdaq) battle to create internet models that are internationally successful.

"America is so successful because internet usage is prolific and ideas catch on quickly in larger markets," said Allon Raiz, the CEO of Raizcorp, the privately held business incubator that supports more than 200 enterprises.

"Entrepreneurs here generally don't have deep enough pockets to sustain the time it takes to break even."

The Silicon Cape initiative is trying to build an ecosystem for entrepreneurs, but has yet to see notable successes.

Private Equity Firms Increase Confidence Of Entrepreneurs

noreply@blogger.com (ben) — Sun, 31 Oct 2010 10:57:00 +0000

Business business confidence in South Africa steadily on the increase, banks are still lagging behind in both lending practices and the confidence needing to be shown in the SME sector that will ensure promising business plans are not hindered due to the lack of business finance. This has lead to the private equity sector in the country coming to the fore with sufficient confidence in the right business plan. This has been a welcome relief for numerous entrepreneurs getting stuck at the funding stage of their new or growing business and will ensure that the growth in the economy will continue.

With the policy of globalization, new doors have opened for Entrepreneurs in South Africa who are keen to take the Indian economy forward. But to compete with the world, South African entrepreneurs need to know how to manage their wealth and save enough for future investments. But most of these businessmen are not fully aware of strategies to manage wealth or keep track of assets. Therefore wealth management firms have come out with latest plans that include asset tracking solution India combined with other methodologies to store clients wealth.

Entrepreneurs in South Africa require the services of a professional financial advisor since most of them are not very well versed with different financial tools. Most individuals therefore seek the help of private firms or agents to manage their wealth. But it is always advisable to approach professional wealth managers who have been associated with private equity firms in South Africa.

Such firms will not only help to expand the business with expert ideas but also help in controlling office assets and finance and manage the private wealth of clients. These members of private equity firms also help with office services in India. Apart from this they can be the best taxation service providers India, who can help you to manage and pay your taxes on time.

Private wealth management firms are the best solution to control your finances for the present as well as the future with facilities. Apart from this, these firms also provide services in managing the family wealth of individuals to protect and save for future generations.
Their services can be better classified into the below mentioned categories;
*Financial Planning
*Wealth Protection
*Private Wealth Management
*Estate Planning
*Family Office

Entrepreneurs in South Africa can benefits by utilising the services of wealth managers in the country, who have taken the responsibility of touching our lives not just by managing your wealth but your family office as well. Since most of the service providers who comprise the advisory board of these firms have been respected members of private equity firms in South Africa, they know exactly how to invest intelligently and also save for future needs.