Part 4- Private Equity
As years went by, the company’s success kept expanding. This 8-year-old organisation had become highly ambitious and so determined to raise the bar that they wanted to spread their wings across the nation. It further broadened its range of achievements by manufacturing as well as retailing fashion jewellery, designer cosmetics and fragrances.
The CAPEX requirement for reaching the new ambition is set at 80 Crs. However, the company does not wish to increase their debt due to the interest rate burden, otherwise known as finance charges, taking a toll on their profits. For example, with Rs.120 in profit and Rs. 30 paid towards finance charges, this results in the profitability of Rs. 90. This topic will be delved into more in the Fundamental Analysis module.
The company made the decision to acquire Series C funding. Instead of a typical VC, which generally offers relatively small sums that tend to run in a range of a few crores, they opted for a Private Equity (PE) investor. Imagine the PE as being like the big brother of a VC. There are several distinctions between these two types of investors:
– VCs usually invest a lesser amount compared to what PE partners typically put in.
– VCs take on considerably more risk than PEs and invest in companies that are at an early stage. Whereas PEs tend to direct their resources towards established businesses, where the risk is much lower.
– Once in, PEs take a board seat and keep an eye on how the company is faring.
PE investors are highly qualified and possess strong professional backgrounds. They bring large sums of money to the table, enabling constructive use of capital, and often appoint a representative to the board of the investee company to ensure that the desired outcomes are achieved.
Typically, a PE will invest in funding major CAPEX costs. They’re usually uninterested in providing support during the initial phase and favour companies with an established revenue and operating record. The use of capital for CAPEX takes time to complete.
Let us assume that the firm obtains money from a Private Equity group and increases its operations.
The next step can be an IPO, which will be discussed in the next chapter.