3 questions to smart minds

On course for growth with minority interests

For this 3 questions to M. Peoples

VR Equity Partner
Photo: M. Völker | VR Equitypartner
21. Novem­ber 2012

In many situa­tions, finan­cing through private equity can signi­fi­cantly advance the growth of medium-sized compa­nies. How do you get custo­mi­zed equity finan­cing that meets the needs of a busi­ness? How are growth targets plan­ned, which factors are decisive here, when does a mino­rity inte­rest and when does a majo­rity inte­rest make sense?

For this 3 ques­ti­ons to Mana­ging Direc­tor at VR Equi­typ­art­ner GmbH in Frank­furt a. Main

1. In which situa­tions do medium-sized compa­nies prima­rily seek equity financing?

For medium-sized entre­pre­neurs, there are many situa­tions in which raising addi­tio­nal equity can make a lot of sense: Upco­ming growth leaps and expan­sion plans, a change in the group of share­hol­ders or the successful realiza­tion of a busi­ness succes­sion are frequent topics. For exam­ple, if a share­hol­der has to be paid out, this usually quickly exceeds the credit limit that the company’s bank makes available to the company. Tail­o­red equity finan­cing can be a good alter­na­tive here. Then, at the latest, it is also neces­sary to consider where the company should deve­lop. This is parti­cu­larly true if previous co-share­hol­ders or even the manage­ment want to take over the shares that become free and conti­nue the company. For us, the goal is always to tailor equity finan­cing to streng­then the inde­pen­dence and room for maneu­ver of the medium-sized company. The increased equity ratio in turn expands the finan­cing frame­work. This enables the entre­pre­neur to focus even more on reali­zing his goals and visions. 

2. How are a company’s growth targets plan­ned in the context of equity capi­tal? Which products can be conside­red for this?

In many cases, medium-sized compa­nies operate in a field of tension: on the one hand, they are commit­ted to tradi­tion and geared to long-term, mode­rate growth; on the other hand, compe­ti­tion demands ever grea­ter orien­ta­tion to globa­li­zed markets, calls for flexi­bi­lity and grea­ter inter­na­tio­na­liza­tion. This costs money, means increased risk and is usually not possi­ble with debt finan­cing alone. Often, the finan­cing requi­re­ment for signi­fi­cant growth projects is between EUR 1.5 and 15 million. Inves­tors with a range of finan­cing instru­ments that can be combi­ned with each other are parti­cu­larly suita­ble for this. Such a finan­cing package includes the clas­sic mino­rity share­hol­ding, and in indi­vi­dual cases also a direct majo­rity share­hol­ding. VR Equi­typ­art­ner also offers vari­ants of mezza­nine finan­cing — for exam­ple silent part­ner­ships or profit parti­ci­pa­tion certi­fi­ca­tes — and can combine these with a direct invest­ment if requi­red. If neces­sary, syndi­ca­ti­ons for equity and debt can also be arranged. 

3. Can and/or does the inves­tor want to influence the stra­te­gic deve­lo­p­ment of a company?

The desire to exert a strong influence on the stra­te­gic deve­lo­p­ment of their port­fo­lio compa­nies is an important reason for many private equity compa­nies to acquire majo­rity stakes in parti­cu­lar. VR Equi­typ­art­ner has its own approach here: we specia­lize in mino­rity share­hol­dings and, as an active share­hol­der, work toge­ther with the exis­ting manage­ment to deve­lop the company further. An important prere­qui­site for success is that the entre­pre­neur and inves­tor share the same values and ideas, both part­ners agree on the same goals and the “chemis­try” between the acting persons is right.

The big advan­tage for entre­pre­neurs in struc­tu­ring a mino­rity share­hol­ding is that they bene­fit not only from the capi­tal, but also from more objec­tive decis­i­ons and from the investor’s know-how, without having to give up control. This also includes the estab­lish­ment of an advi­sory board that serves as a spar­ring part­ner for manage­ment. The intro­duc­tion or opti­miza­tion of profes­sio­nal control­ling and moni­to­ring systems is also part of this coope­ra­tion. Such tools can make a signi­fi­cant contri­bu­tion to impro­ving the control of company opera­ti­ons such as produc­tion proces­ses, capa­city utiliza­tion as well as inven­tory levels and working capi­tal manage­ment — important buil­ding blocks in the context of a company’s deve­lo­p­ment geared to long-term success.

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