About Private Equity

The investment process, from the initial busines’ assessment to signing the transaction’s documents/realizing the initial investment, usually takes three to six months.

Initial  Valuation

To understand and evaluate the merits of a potential investment, the company/potential investee must offer the PE/VC fund information allowing them to express interest:description of the company’s business/products/services etc, business plan, financial statements (audited, if available), allowing on-site visits and meetings with the management. The amount of information confidentially exchanged depends on the stage of development for each company and generates a roadmap for driving the company to the next level.

Initial Investment Proposal

Providing a VC/PE fund is interested in a certain company, it will formulate an initial proposal to the potential investee,  containing the general terms and structure of the porposed investment.

Due Diligence

After the initial investment proposal is accepted (by signing a Term Sheet/Memorandum of understanding that details the main terms and structure of the potential investment), a due diligence process is completed, aiming  a deeper understanding and validation of the business’ assumptions/plan. The due diligence (financial, legal, technical, commercial etc) may be conducted by the Fund’s professionals or by third parties employed in this respect.

Final Negotiation and Completio-after the Fund’s assessment and due diligence investigations, providing the results are satisfactory, the Fund usually makes a final proposal that contains the proposed prive/valuation of the business (and consequently the percentage stake in the company), the envisaged transaction structure as well as roles & major rights and obligations. Upon acceptance of this proposal, legal documents are prepared and signed. A shareholders’ agreement will mention all rightsand obligations of both parties covering the terms of investment, voting rights, dividend policy, rights and obligations regarding a future sale of the company/Fund’s participation etc.

Monitoring

The PE/VC representatives on the company’s (non-executive) board will be able to participate actively on all major decisions. They will also monitor the Fund’s investment through regular reviews of financials and operations with management.

Exit

PE/VC Funds usually exit the investment within 3-5 years after the initial investment date, provided that the economic cycle is not adverse. There is a clear agreement with the other shareholders that PE/VC Fund requires an exit and the exit strategy is agreed before the investment is made.

Both VC and PE firms both raise capital from professional investors (limited partners) in order to invest in privately owned companies, aiming to increase the value of the businesses they invest in.

There are several diferentiators between PE and VC:

• type of the company;
• level of capital invested;
• the share of equity obtained in the respective company/investee
• the moment of initial investment, with regard to the investee/company’s lifecycle

Private Equity funds invest in more mature companies/established businesses operating in traditional industries (often take a majority stake / 50%+ ownership) with the aim of streamlining operations and driving business growth.. In contrast, Venture Capital funds invest in start-ups and companies at an early stage of development, often tech-companies that show potential for long-term growth (in most of the cases in exchange of minority  stakes/<50% ownership)..

VC investments are usually lower (< € 1 million), while PE funds mostly invest larger amounts into one company (> € 5 million).

The choice between listing and Private Equity depends primarily on the entrepreneur and what he seeks to achieve through the funding attracted. Also, an IPO choice may be limited by the liquidity of the relevant stock exchange for the respective company/region. The main differentiating factor is that by listing on the stock exchange a company attracts passive investors, while the Private Equity investor is an active one. A company that raises money through an initial public offer (IPO) must subsequently follow a rigorous reporting program on their business’ performance , but, on the other hand, shareholders are not involved in business decisions, except when their vote is required by law.

While there are several sources of financing available to growing businesses, Private Equity is unique in the flexibility and management expertise it offers to investee companies.  Private Equity firms are in the business of both helping fledgling companies to grow and managing struggling companies back to corporate health.  Therefore, Private Equity fund managers, through these experiences, develop expertise in all areas of corporate management: business strategy, legal affairs, human resources, and technology to name a few.  Investee companies can and do leverage this extensive expertise as fund managers share and apply their knowledge to every company in which they make an investment. 

Moreover, Private Equity investors are committed to providing this assistance over the long term: investments in companies are generally held for a period of three to five years.  Private Equity financing has the advantages of public equity financing (there is no direct obligation to pay dividends to shareholders) but comes without the pitfalls.  Public shareholders often demand immediate results. Therefore, an PE fund is a more patient investor than capital market investors, who have the ability to penalize companies for poor results or depending on the general market context.