Thursday, May 31, 2007
Corporate Venturing in Zimbabwe
Large pools of funds necessary for PE perfomance, create another investment alternative for corporates. This is through corporate venturing whereby corporates (read Delta, BAT, Interfresh) directly take up equity in unlisted companies. Alternatively corporates can indirectly take up equity through investments into a private equity fund, which then buys equity on the funds behalf. The advantages of this approach is outside hetting shareholder approval, restrictions vis a- viz regulations are minimised as compared to banks for example. With pension funds there is also the aspect of prescribed assets which can be changed at the government's whim. next time we will look at structuring of PE vehicles in Zimbabwe and teh regulatory issues if any. later
Tuesday, May 29, 2007
Private Equity in Africa
Private equity investing means putting capital into a business to expand, develop new products or fund changes to ownership and management. Private equity investors do more than buy the rights to share in a company’s return – they provide working capital. As respected investor Warren Buffett puts it: “Buy a business, don't rent stocks.”
Private equity investors generally provide their capital in exchange for a sizeable stake in the business. They also invest their expertise – in management, finance, marketing, strategic direction and networks. By exercising some control through board seats and management agreements, private equity investors can protect and grow their investment. This alignment of interests and the ability to add value to the business often means that private equity investors can generate higher returns than those available from traditional ‘hands-off’ equity investing.
In Sub-Saharan Africa, private equity (PE) is still to take hold, possibly due to the onerous regulatory requirements for standard financial services. It is really not a function of a lack of high net worth clients. Another aspect for consideration is entreprenuirs are still in 'love' with the traditional financing means i.e. bank loans, exchange listings etc. however, PE does provide a viable alternative financing arrangement. A key challenge for any potential PE setup will be the need to harness funds from cash rich pension funds. Outside listed equities and government securites and bonds there is a dearth of alternative investment schemes for pension funds. in the case of high net worth investors consideration will be property investments but the challenge is obviously liquidity considerations.
The is a very strong case for PE funds in Africa. As an investment vehicle, global PE perfomance has has been more superior to the stock market. Between January 1986 and June 2002 the pooled internal rate of return (key performance measure for private equity) of the international private equity funds average 21.7%. In contrast, listed international equities (as measured by the All Ordinaries Accumulation Index) gave investors a 12.7% return over the same period. A similar, if less extreme, return differential is much larger in the American market.
It provides for more effective divesrification. Investors have long known that adding more assets to an investment portfolio can add to returns and reduce risk. Private equity offers investors a similar benefit. Private equity is a long-term, illiquid investment and it is valued infrequently. Because private equity is so different to listed shares the two asset classes are lowly correlated and therefore don’t tend to rise or fall at the same time. Private equity returns are not tied to the performance of a market or index. Most of the return is generated by the manager’s skill in selecting, directing and then exiting their companies. As a result, adding private equity to your portfolio can increase returns while reducing overall risk.
Columbia’s Amar Bhide (Glaubinger Professor of Business) did a long study of business growth and concluded that “most successful entrepreneurs start in unstable markets”. A sluggish economy makes it hard for companies to list on the market or achieve a trade sale. Seeking a private equity partner can quickly become the most logical alternative. Tough economic conditions also pressure larger companies to divest non-core or underperforming businesses, providing opportunities for private equity investors. The doyen of world share market investors, Warren Buffett, is using a private equity strategy within his investment vehicle, Berkshire Hathaway, a long term holder of large chunks of companies like Coca Cola and American Express.
Private equity investors generally provide their capital in exchange for a sizeable stake in the business. They also invest their expertise – in management, finance, marketing, strategic direction and networks. By exercising some control through board seats and management agreements, private equity investors can protect and grow their investment. This alignment of interests and the ability to add value to the business often means that private equity investors can generate higher returns than those available from traditional ‘hands-off’ equity investing.
In Sub-Saharan Africa, private equity (PE) is still to take hold, possibly due to the onerous regulatory requirements for standard financial services. It is really not a function of a lack of high net worth clients. Another aspect for consideration is entreprenuirs are still in 'love' with the traditional financing means i.e. bank loans, exchange listings etc. however, PE does provide a viable alternative financing arrangement. A key challenge for any potential PE setup will be the need to harness funds from cash rich pension funds. Outside listed equities and government securites and bonds there is a dearth of alternative investment schemes for pension funds. in the case of high net worth investors consideration will be property investments but the challenge is obviously liquidity considerations.
The is a very strong case for PE funds in Africa. As an investment vehicle, global PE perfomance has has been more superior to the stock market. Between January 1986 and June 2002 the pooled internal rate of return (key performance measure for private equity) of the international private equity funds average 21.7%. In contrast, listed international equities (as measured by the All Ordinaries Accumulation Index) gave investors a 12.7% return over the same period. A similar, if less extreme, return differential is much larger in the American market.
It provides for more effective divesrification. Investors have long known that adding more assets to an investment portfolio can add to returns and reduce risk. Private equity offers investors a similar benefit. Private equity is a long-term, illiquid investment and it is valued infrequently. Because private equity is so different to listed shares the two asset classes are lowly correlated and therefore don’t tend to rise or fall at the same time. Private equity returns are not tied to the performance of a market or index. Most of the return is generated by the manager’s skill in selecting, directing and then exiting their companies. As a result, adding private equity to your portfolio can increase returns while reducing overall risk.
Columbia’s Amar Bhide (Glaubinger Professor of Business) did a long study of business growth and concluded that “most successful entrepreneurs start in unstable markets”. A sluggish economy makes it hard for companies to list on the market or achieve a trade sale. Seeking a private equity partner can quickly become the most logical alternative. Tough economic conditions also pressure larger companies to divest non-core or underperforming businesses, providing opportunities for private equity investors. The doyen of world share market investors, Warren Buffett, is using a private equity strategy within his investment vehicle, Berkshire Hathaway, a long term holder of large chunks of companies like Coca Cola and American Express.
Friday, May 18, 2007
Welcome to My World
Private Equity is the latest buzz in the financial arena at the moment, what with the recent demerger of DaimlerChrysler, record breaking deals by the Blackstone Group and Carlye. Essentially though, private equity is about pooling investor funds (to be continued....)
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