In wealth creation there is various investment vehicles that one can choose to use to grow their money and secure their old age. Private equity happens to be one of the ways to invest your hard earned money and watch it grow over a specified period of time.
The PE Concept
The concept is simple; fund managers pool money from high net worth individuals and institutional investors to invest in companies not listed at the securities exchange. The underlying principle is that of getting a controlling stake in the companies through purchase of majority of their equity, improving efficiency in the companies and later on selling off the companies after their value has grown.
The steps sound very easy and fast to achieve, but there are a number of things one must put in place before venturing into the PE industry.
Requirements Before Starting a PE Fund
For first-time fund managers with an interest in the PE industry, a little house keeping is in order before you swallow the bullet. A little it is, but it might take a long time and be very exhausting before you finally can turn on the engines of your PE fund and start sailing through the stormy waters of the PE industry.
First of all you need to have a track record of having successfully grown other companies in the past thus creating value for investors in the companies. Without proof of a superb performance in the past, you are unlikely to get anyone interested in your PE fund. No one wants to risk their money with amateurs! So if you want to one day own and run your own PE fund, you better be getting down hard and dirty in creating value in existing companies and driving them to excellence.
The second most important thing in the PE industry is networks. No other place is social capital a necessity than in PE fundraising. To successfully raise enough funds for your fund, you need to be well networked with respectable business leaders in town. Your former employer and your fellow former employees should be able to sell you for free to investors they are connected to. Your business partners should be your marketing agents and walking billboards all over. In summary, you need to have a strong positive reputation among your peers and in the industry as a whole for you to launch your PE successfully.
The other fundamental requirement is that you should be having your own capital to invest in your PE fund. The investment can range between 1% to 5% of the fund; and it helps the investors to also have faith in the fund by having the owners of the fund investing their money in it too.
Finally, you need to have a placement agent to help you link up with the institutional investors and high net worth individuals. These are the people who help you market your PE fund to the potential investors and help you mobilize the funds you need to launch it. They are very vital in that they are well connected to the investors and will assist you in doing due diligence before getting investors on board. On the other hand, they can advise on the strategic plan for the fund and ease your pressure so that you concentrate on portfolio management rather than the day to day running after investors.
With the above in place you are then good to try your boat in the sea of private equity investments.
In Kenya the PE industry is not as vibrant as in the developed world. This can be attributed to the fact that we are still a developing economy and our financial markets are still growing. However, foreign investors in PE from the West are moving towards the East in China and India as emerging markets; and we can only expect the tide to turn to Africa very soon as our markets mature.
A guest post by RIRO JEREMY of fieconsult.co.ke
