Private equity typically refers to investment capital that is not publicly listed or traded. They are mostly offered to investors who are deemed high net worth or firms who purchase shares of private companies. Venture capital, growth capital, and management buyouts are all examples of private equity investments in Nigeria.
These investments are pools of funds to be invested in companies that represent a window for a high return on investment. They usually come with a fixed investment time frame, typically ranging from three to ten years.
At the end of the investment cycle – the investors hope to successfully and profitably exit the investment. Exit strategies are quite important for these investors because their sole aim is to make a profit regardless of market fluctuations. Their exit strategies could include a successful launch of an initial public offer and sale of the business to other private equity investors.
Institutional funds and accredited investors usually make up the primary sources of private equity funds. This is because they can provide robust capital funds for long periods of time. The management and administration of the funds are assigned to a team of investment professionals from a private equity firm.
Types of Private Equity
When investing in private equity in Nigeria, there is a considerable variety of investment which include:
Buyouts. Investment in relatively mature, established companies, using a combination of debt and equity financing.
Special situations. Involves restructuring of companies both from a financial and operational standpoint, and may involve the purchase of distressed assets or debt.
Growth capital. This involves the process of working in partnership with a founder or entrepreneur, the investor provides capital to help a company grow.
Venture capital. Investment in new, potentially high-growth, businesses alongside company management. Venture-capital financed companies may be exposed to more risk because of their investment in the early stage of the business.
Private Debt. Investment in middle-market companies that provide fixed income returns capitalizing on the illiquidity premium.
Depending on the investor, a core allocation to private equity may complement other alternative investments, such as real estate and a hedge fund.
As stated earlier, the exit strategy for private equity investors is a crucial part of their investment strategy. Without a strategic exit plan, no investor would be willing to take up private equity holdings in any company.
There are several factors that influence the exit strategy of private equity fund investments – some of them are listed below;
- The investment cycle – i.e. when will the exit happen
- Management team’s readiness for the exit
- What are the exit options
- What is the current business strategy being implemented by the company
- Who are the potential buyers
- What is the expected internal rate of return (IRR) – IRR simply refers to a metric used to calculate the profitability of potential investments.
There are typically two(2) options when exiting a company as a private equity investor. They are total or partial exit.
The total exit refers to a total sale of the company to another private equity firm or buyer. In the case of a partial exit, an exit could come in a way of a private placement to another investor who takes up a percentage of the business. It could also come in the form of a corporate restructuring (investors increase their stake in the business) or corporate venturing (where management of the company decides to increase their stake in the business)
Finally, an Initial Public Offer (IPO) launch is a hybrid form of an exit strategy. This is because it involves both total and partial strategies.
It is important to note that seeking out a private equity investor is done through private equity firms. In Nigeria, there are private equity firms operating out of Nigeria and they include Norfund Capital, Verod capital, GroFin Nigeria, ARM Capital Partners, etc.
See also: Merger and Acquisition in Nigeria