When a company’s strategic focus turns to equity raising, it is critical for the company to determine what type of investor will best support the company’s strategic imperatives over the long term. Robert Peché, Corporate Finance Associate at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions services, highlights the key differences between strategic and financial investors and the drivers of their respective investment decisions.

The key steps to a successful equity raising process are a clearly articulated strategy, detailed analysis of the various sources of capital and selecting the right type of equity investor.

Financial equity investors include private equity and other investment funds, usually operating under specific mandates, with highly skilled investment professionals at the helm. A high net-worth individual, family office or listed investment holding company with a permanent capital structure could also be a financial investor.

Strategic investors have an investment strategy that goes beyond purely financial returns. This includes trade players endeavouring to consolidate the market, suppliers or customers attempting to vertically integrate their businesses, or investors aiming to acquire a distribution network for products, specific intellectual property or other business infrastructure.

The focus for financial investors is purely on financial returns and thus emphasis is placed on entry price, dividends during the period of investment (including through debt refinancing) and eventual exit price. Financial investors will usually consider a negative controlling stake as a minimum, with preference for a controlling stake. This is usually motivated by a need to control the cash flows generated by the operations of the business.

Some financial investors have defined investment periods (e.g. certain private equity funds with a seven year life-span) and thus require exit mechanisms (such as put options). Others take advantage of permanent capital structures (e.g. listed investment holding companies where shareholders achieve liquidity through selling their shares rather than winding up the fund) to enable greater flexibility in deal negotiations.

Categories:  News, Corporate Finance

Published in Accountancy SA October 2017