This 2nd installment of our private equity series looks at how investors have succeeded this past year. While these tactics are well known by major private equity institutions we also consider the smaller investor and those investors new to emerging market investing. This investor could be a family office, or an accredited individual investor or investor group that prefers direct investing over the limited partner role. [We will use the term “small investor” to encompass all of thee groups realizing that they are not always small in dollar terms] The approach we advocate comes under the general heading of value enhancement or value creation.
Successful emerging market investors contribute more than money to the success of their portfolio companies. With their own resources and by marshaling expertise in their networks they can enhance the value of these companies leading to a more favorable outcome at exit. This is typical of the large PE firms whose senior staff often have operating as well as financial experience.
Although not all investors will have this kind of expertise on staff, those with strong networks can mimic the kind of value enhancement that is standard procedure at the large institutions. There are professionals with region or sector specific expertise that can deliver on an outsourced basis what they cannot do in house.
Here are three value enhancement strategies:
1. Upgrading business processes
The investors’ due diligence should include an assessment of the company’s strengths as well as any challenges that would impede its ability to implement its business strategy. Process improvements can occur in any of several areas:
Strengthening the management team
ESG (Environmental, Social, and Governance) upgrades such as social impact measurement using IRIS, implementing a diversity strategy, or improving environmental sustainability
Small investor’s approach: Engage advisors with background in: the portfolio company’s industry, accounting and/or finance, ESG reporting & measurement.
2. Help portfolio companies open new markets
Within their region – especially important in African countries where it makes sense to combine several small country markets into larger regional ones.
In investor’s home market. There are companies that assist international firms in entering and selling in the US.
Essential for companies with small domestic markets. Opening new markets is key for Caribbean companies who need to go outside their small markets in order to scale.
Small investor’s approach:
Use investor’s network to link portfolio company to export opportunities.
Engage business development & marketing firms that specialize in helping foreign firms enter the US market
3. Provide constructive influence to portfolio companies even with a minority share
Small investor’s approach:
Work with companies where entrepreneurs’ managers’ and investor’s interest are aligned. Use the due diligence period to assess the mindset and culture of management. Look for:
Management teams and shareholders with a long term outlook
Shareholders with skin in the game, cash or mortgageable real estate for example.
In some cases it is feasible and desirable to have a level of decision making authority written into the deal.
Create alliances with like minded shareholders.
These are some of the ways in which a small PE investor can be helpful to emerging market portfolio companies to the benefit of all stakeholders.