In the last Silver Talk, we discussed Investment Funds and Private Equity as alternatives available to companies to raise capital and finance their growth, taking a closer look at what they are and how they can be useful for your business.
Investment funds and private equity are two key financial alternatives for companies seeking capital, growth, or restructuring. Although they share similarities, they differ significantly in their approach and strategy. This time, we will delve deeper into the mechanisms and entry structures preferred by investors, as well as success stories of such transactions.
1. Investment Funds: Flexible Participation
These are vehicles that pool capital from different investors to invest in assets such as stocks, bonds, startups, real estate, and more. They are generally more flexible in their participation and do not seek to control the company but rather aim to generate returns through the appreciation of their investments or dividends. The most common ways they participate in companies include:
- Minority Equity Stakes: Investment funds typically acquire minority stakes in companies, benefiting from the company’s growth without becoming involved in daily operations.
- Convertible Debt Instruments: Some funds prefer to invest through instruments like convertible bonds, which allow them to lend money to a company with the option to convert that debt into equity in the future.
Let’s imagine a fund investing $1 million in convertible bonds in a company. If the company grows, the fund can convert those bonds into shares and share in the profits. - Sector-Specific Funds: Some funds focus on specific sectors (technology, real estate, energy, etc.) to invest temporarily and sell their shares once the company reaches a higher valuation.
2. Private Equity: Active Participation and Control
Private equity, on the other hand, is a specialized form of investment that typically seeks a more significant stake in the company, often influencing its management and strategy with the goal of increasing its value and later selling it for a profit. The most common forms of participation include:
- Majority Equity Acquisition: Private equity funds often acquire a majority stake in the company, giving them control over strategic decisions such as expansion, restructuring, or the eventual sale of the business.
- Joint Ventures or Strategic Alliances: In some cases, a partnership is formed with the company’s current owners, sharing control and risks. This is common in expansion or internationalization projects.
- Full Company Buyouts: Sometimes, private equity funds acquire 100% of a company, especially if they intend to restructure it or prepare it for a future sale.
- Growth Equity: Some private equity funds specialize in already-established companies with high growth potential. In these cases, they don’t seek full control but a significant minority stake.
For example, a growth equity fund invests $5 million in a growing software company, acquiring 30% of its shares. It then works with the company to scale operations and increase its value.
Once we understand the ways these investors participate in companies, we can look at several success stories in the business world where companies rebounded or improved their situation thanks to these capital-raising alternatives. Here are a few examples:
Starbucks
The company was facing declining sales, over-expansion, and increasing competition. In 2008, during the financial crisis, the venture capital firm Highland Capital Partners invested US$250 million through the purchase of convertible bonds. This capital injection helped Starbucks avoid immediate equity dilution while gaining liquidity. It also helped the company refocus on its core strategy and improve profitability, which led to a significant increase in market value in the following years—benefiting both the company and its investors.
Dell Technologies
Dell faced challenges in the computer market due to declining hardware sales, shareholder pressure for short-term returns, and the need to pivot toward enterprise solutions (software, servers, cloud).
As a result, in 2013, Dell Inc., founded by Michael Dell, underwent one of the largest leveraged buyouts (LBO) in history, led by Michael Dell in partnership with the private equity firm Silver Lake Partners, for US$24.9 billion. This transaction allowed Dell the flexibility to restructure away from public market pressures. Later, in 2016, Dell acquired EMC Corporation, creating Dell Technologies, one of the world’s largest technology companies.
Choosing between investment funds and private equity depends on the company’s needs and the level of involvement it is willing to concede. While investment funds provide capital without interfering in management, private equity brings not only money but also expertise and control to drive growth. In both cases, it is crucial to negotiate clear agreements that protect the interests of all parties involved.