Private Equity (Cont)

 Areas of intervention of private equity

 Private equity is involved in:
 The creation of a business and the financing of new technologies
 Companies with growth and strong development potential
 Acquisition, or transfer of businesses
 The buyout of companies in difficulty
 Goals
 The objective of private equity is to achieve, over time, a capital
gain proportional to the risks taken. The terms of exit are varied,
the sale of the securities can be carried out on the stock
exchange, for the benefit of the founders or financial third
parties

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 Private Equity (Cont)

 Private equity contributions

 Private equity contributes in any case:
 To meet the capital needs of unlisted companies
 Intelligently direct funds from financial institutions to these companies
 To finance business growth through a clearly defined strategy
 The actors: 3 actors are put in relation:
 Providers of capital:
capital institutional investors, insurance companies, pension
funds, banks, large industrial groups)
 Venture capitalists:
capitalists who invest the capital entrusted by the contributors
 Entrepreneurs:
Entrepreneurs creators or developers of companies seeking equity

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 Private Equity (Cont)

 Venture capital refers to "any capital invested by a professional

financial intermediary in companies or specific projects with
high potential; it is characterized by a supply of capital coupled
with a service offer "(EVCA).
 It’s about :
 a method of equity financing for innovative SMEs with growth prospects.
The capital is granted without guarantees, only the quality of men and
projects is taken into account.
 But also, an offer of value-added services to SMEs. By his mission of
consulting, his implication in the management of the business, the
financier becomes an active partner of the leaders; since he has no
guarantees, his interest is to contribute as the entrepreneur to the
valuation of the firm.

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 Private Equity (Cont)

 Stages of intervention (forms of private equity)

 The involvement of private equity firms in a business occurs at any point in
its life cycle. It can be an initiator role or an accompanist.

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 Private Equity (Cont)

 The 6 life stages each related to the suitable private equity

investment are as follows:
 DEVELOPMENT : The life cycle starts with development. It is the
moment in which the founders start to create and try to develop the
business idea. The corresponding investment of the PEI is seed
financing.
 STARTUP :This is when the business actually starts. For this phase, the
PE investment is called startup financing.
 EARLY GROWTH : This represents the moment when the company
start its growth. In the professional world, this is known as “the financing
of the day after.” The PE investment is the early growth financing.
These kinds of investment make up the venture capital
subsample.

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 Private Equity (Cont)

 EXPANSION : In this phase, the sales keep on growing at a very high

rate. The corresponding investment of the PE is called expansion
financing.
 MATURE AGE : This is the moment when sales growth is stable. The
PE investment is called replacement.
 CRISIS : In the end, when (and if) the company comes across its decline,
in this case the PE investment will be very hard and it is called vulture
financing.
 In each stage, there is a different market and a different risk-
return profile.

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 Private Equity (Cont)

 Venture capital Fundamentals

 Seed Financing : is the most complex and riskiest activity among the PE
investment.
 It is the investment of an idea or of an research and development (R&D)

project, it is in fact very industry-oriented: it usually deals with the

biomedical, IT, and the pharmaceutical industries / sectors. Under seed
financing, the uncertainty of the project is high because the investor has to
trust the idea of the entrepreneur. This is why the managerial role of the
investor is very limited.
 There are 2 levels of risk:

 The capability for the idea to generate on output

 If there is an output: does this output have a marketability?

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 Private Equity (Cont)
 Startup Financing : It is the financing of a new company starting its own
initial operations.
 The entrepreneurs and the founders’ need of cash derives from the

necessity to buy the necessary equipment to start (e.g. equipment,

inventory, building, etc.) the business. In this kind of financing the risk is
still very high, leading to a high level of protection for the investor.
 The level of risk depends on the fact that the PEI is betting on a business

plan.
 Early Growth Financing : It is the financing of the first phase of growth of a
new company that has started generating sales.
 The entrepreneurs and the founders’ need of cash derives from the

necessity to buy inventory and to sustain the gap existing between cash
flow and money needed. In this phase, the cash flow is still negative, but
not as much as in the previous stages of life of the company.
 The risk is still high for the PEI since it is investing in a very young

company and when they make the injection, they do not exactly know how
the company will turn out. 8
 Private Equity (Cont)

 Expansion Financing : It takes place in the fastest phase of growth of a firm

to consolidate its position in the market.
 The investment is only used to sustain the (reducing) gap existing
between the cash flow and money needed.
 In this phase, the level of risk is moderate (and it mostly depends on the

business) because the trend of development of the business is well

known.
 In this cluster, the stake held by the PE is not usually very high. The

expansion financing deals are about the growth of a company.

 Replacement financing : It takes place in the mature age of a company and
the role of the PEI is that of replacing an existing shareholder.
 These deals do not derive from the arise of need of money of a company.

 A company needs replacement financing when it wants to face strategic

decisions linked either to governance, status, or corporate finance

decisions. The level of risk is moderate and linked to the quality of the
strategic process that has to be put in place. 9
 Private Equity (Cont)

 Vulture financing : It takes place in the final stage of a company’s life

cycle, when it enters its decline phase or, worse, a crisis.
 Money is used to sustain the financial gap generated from the decline of

growth. The financial aid coming from the PEI is used to launch a
survival plan.
 Due to the life stage, this activity is very risky, even though the level of

risk also depends on the sector of the venture-backed company. For this
reason, the PEI fully understand the field in which the company
operates.

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 Private Equity (Cont)

 The Managerial Process of private equity

 Equity investments can be developed through different vehicles and each

operate with a different legal entity.

 Even if vehicles are different, managerial practices and typical phases of

activity are very similar.
As a matter of fact, the functioning
is based on two different players:
Managers and investors.

 For this reason, it is important to understand the different aspects of the

Managerial Process of private equity.

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 Private Equity (Cont)

 The managerial process is the day-by-day activity of the

managers managing the investment made by the investors.

 When highlighting the characteristics of the managerial

process, both academia and practitioners consider this process
as made up of four steps:
 Fundraising
 Investment activity
 Managing and Monitoring
 Exiting

 For each phase, there is also a different contribution coming

from the management themselves, the advisory and the board
of directors.
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 Private Equity (Cont)

 Fundraising

 This first activity of fundraising is included in the managerial process

even if this activity starts before the vehicle is launched.
 The fund-raising activity is devoted to promote the business idea of the
new vehicle of equity in order to find money.
 It is in fact a very preliminary activity
 If managers are able to collect the whole investment and they are able in
this way to get to time 0, the legal entity starts its activities and then the
other three activities (investment, managing and monitoring, and exiting)
start.

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 Private Equity (Cont)

 When the fundraising phase comes to an end, the other three phases start.

 In the ordinary activity the managers have to decide the investment policies
and the investment target; at the same time they manage and monitor the
company in which the investment is made; and, at the same time, they have
the exiting issue; that is they have to understand when (and if) they will be
able to exit.

The exiting moment is in the

end the reason why managers
do PE activities.

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 Private Equity (Cont)

 Investing

 Investing is the mission of the equity investment vehicle to create value for
the investor through the scouting, the screening, the choice, the managing
and the exiting of ventures.

 From when they decide to invest, managers have two problems: on the one
hand, they have to valuate the company in which they invest; and on the
other hand, when managers decide to invest they have to negotiate the
mechanisms supporting their management of the company. If the decision
of the investment is made, the managerial process enters another phase:
The management and monitoring phase.

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 Private Equity (Cont)

 Managing & Monitoring

 Managing and monitoring activities concern the involvement of the vehicle

in the selected ventures. These two activities have to ensure the creation of
value and to control the opportunities for the financed venture.

 When in this phase, the PE is a shareholder because the PE decided to invest

in the company.

 The managers have to support and sustain the company in the ordinary
activity. For the managing and monitoring to be successful, the last phase
has to come.

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 Private Equity (Cont)

 Exiting

 Exiting concerns the decision to sell the equity owned in the portfolio in
order to have a gain. This single decision has to be planned with a broad
portfolio vision.

 For this to happen, the PE has to identify another shareholder to which they
sell their stake of the company. Because the liquidity is very low, finding a
counterpart is not easy.

 This is the most important phase, because it is only with the exiting that the
PE is able to exit the investment and generate a capital gain.

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 Private Equity (Cont)

Private equity penetration (2014-2015)

 The Private equity penetration rate in the MENA region remains among the lowest
at the international level.
 A 25.9% drop in the penetration rate of Private Equity in Tunisia between 2014
and 2015. 18
 Private Equity (Cont)
Africa’s private equity market has grown over the 25 past years

19
 Private Equity (Cont)
Investments are more geographically dispersed with Eastern,
Central and Western Africa gaining popularity

20
 Private Equity (Cont)

The keys to winning in Africa’s evolving market for private

equity
https://youtu.be/JwKqCM_4iuY
https://youtu.be/TckQboQdlRQ

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 Private Equity (Cont)

 This is a study of 120 countries. It measures the attractiveness of venture

capital and private equity in a country.
 Between 2010 and 2014, fund managers invested four times more in
Morocco than in Tunisia. Tunisia is ranked 65th in the 2015 ranking of
Venture Capital and Private Equity Country Attractiveness Index, while
Morocco is 58th. 22