Private equity key to business growth

Private equity is a form of investment where a private party provides the necessary funds for businesses to expand and speed up growth.

Often, private equity investors choose companies to fund and sometimes buy into management to ensure the funds are handled prudently.

The term "private equity" encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assets such as corporate stock or bonds.

Private equity investors seek to obtain a substantial interest in a company in order to gain control over the firm’s management. Their goal is to boost the value of a company, sell off their investment and walk away with substantially more money than they put in. The amount of money flowing through private equity funds is on the rise in Kenya.

Private equity is gaining popularity because it provides a way for investors to have tight control over a company’s strategy, management and financial decisions without the quarterly scrutiny, public disclosure requirements and regulatory oversight faced by publicly listed firms.

Impact of private equity

Private equity investors tend to be either institutions or very wealthy individuals, so the average worker might not directly experience the ways in which private equity is having an impact upon corporate strategy and governance.

Nevertheless, private equity can have a significant impact on how your company is run or the way it positions itself to compete in the current business environment.

On the modest end, if you work for a small business that has received private equity funding or a startup backed by venture capital, it is very likely that private equity investors play a significant role in your company’s board of directors.

On a day-to-day basis, that means you’re likely to see higher expectations for sales targets and new business goals. If senior management cannot meet those objectives, expect to see new faces in the office soon. Among larger companies, private investment is responsible for an increasing chunk of mergers and acquisitions, a process that can be extremely disruptive to employees.

If you work for a company financed by private equity, be aware of the investors’ timeframe for cashing out. When an investment group decides to sell a business, the investors may demand layoffs or other cutbacks to improve the balance sheet and make the company more attractive to suitors.

On the other hand, they might offer retention bonuses to keep valued employees. Private equity firms specialise in increasing the value of their holdings by reinvigorating the management of a company. This can mean strengthening leadership, refocusing strategy, reducing cost structures, instituting growth initiatives or even breaking up the company to sell it in parts.

The weak spots

Critics charge that private equity investors seek to boost the value of a company as quickly possible, with little regard for intangible factors such as company history, culture or workplace environment. In other words, while private equity is great for investors, it may not be so much fun for the companies they invest in or the people who work for them.

Currently, our market has a financing model that is heavily bank dependent. Our capital market must be developed and after corporate bonds and listing in the stock market, private equity is third natural thing to consider as financing options for businesses. However, problems exist in implementing this method of raising capital. The fundamental problem is a cultural one.

We require a major cultural change in the way corporate and people look at private equity. Small and Medium Enterprises must be helped out in order to develop our economy and private equity must be used in a way they also get management expertise.

Together with adopting a more thought out development orientation to a private sector driven private equity funding base, it is important to get rid of governmental red tape to create a business environment that is more accommodative and friendlier to startups.

The writer is an Investment Banker. Email: nyabolla@gmail.com