For those individuals and businesses looking to raise capital, using private equity to gain capital especially as far as the SME market is concerned, seems to be one way forward, particularly for those that might not meet the precise criteria to be eligible for bank loans.
Even when small to medium enterprises or individuals can raise finance from banks they would need to proffer security and be subjected to stringent covenants while paying back the loans, and in many instances there is not sufficient security.
If a company or individual cannot produce a record with a financial institution, this is even more problematic. The time frame in which loans from banking institutions require them to be paid back could also prove to be a dilemma especially as they develop and grow.
Private equity, generally, provides loans in exchange for shares or equities in a business but this is usually if the cash flow of a business is positive and the administration team has a first-class record of delivering returns – making these companies attractive to private equity players.
A major benefit is that equity is not a loan per se, therefore the cash flow of the business will improve with the new equity funding for the business, reinforcing the balance sheet and permitting upcoming growth.
Pointers for when approaching your private equity partner:
- Funding will be modified to each business to avert the company from being overburdened by lending criteria and demands for repayment.
- Take special note that there are numerous private equity players in the market which specialise in different industries.
- Many of these might find it increasingly difficult to raise debt from banks, considering South Africa’s current unstable economic status – but take note that private equity can take a medium-term view and advance capital provided the business look sound.
The key criteria considered by private equity providers includes the company having an established management team, a history of profits and the company functioning in a market that supports a steady and affirmative cash flow.
Satisfying profits will largely depend on several factors – these are the rand dollar exchange rate, interest rates and possible strike action which will obviously affect certain sectors of the market.
Private equity is an option in the current economy – do your homework to find out which option fits you and your business best.