CAPITAL

CREATION

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Creativity in Finance

To many people, capital creation is only about finding investors that will offer investment in exchange for shares in an enterprise, or offer you debt against the security of current assets and. possibly, future earnings.

However, there is far more to capital creation that first meets the eye. Many deals must be STRUCTURED, not only to ensure the most beneficial terms for the enterprise and its founders, but also to give the deal added attraction to potential financiers.

Sometimes, a pure equity stake just doesn’t cut it with potential investors, particularly when the amount being sought doesn’t equate to the true value of the enterprise. However, this doesn’t mean that a financially sensible deal cannot be put on the table.

The key to success is structuring the proposition to minimise investor risk, whilst giving the investor the potential of substantial returns. This is often achieved through the issue of a combination of financial instruments that aims to preserve capital investment whilst, at the same time, creating more profit involvement later down the line.

SIBC prides itself on its expertise in the field of creative capital creation. We will develop solutions where others will simply reject a proposition. Our solutions can make the difference between success and failure.

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Venture Capital

There are currently over 6,000 global venture capital firms in the SIBC database. Each of these firms have specific investment criteria and industry preferences. Although some of these firms will invest as little as a few thousand into new start ups, there are a growing number who won’t look at any proposal that requires less than 20 million. Collectively, the pool of venture capital funds is huge. In the US alone, committed venture funds amount to circa 200 billion dollars.

In order to distinguish between Venture capital and Private Equity, it’s important to understand the different mindsets of each type of investment group. Venture Capitalists like to invest in young companies that have the potential of growing rapidly into major corporations. This ideology is largely “people driven”. In other words, VC firms like to invest in people and innovation.

Private equity firms, on the other hand, prefer to invest in existing enterprises that have already proven themselves, but may be suffering from a lack of financial performance. The private equity investor prefers to start with the numbers and then optimise performance through restructuring. Whereas VC firms prefer to invest in the people that can turn innovation into numbers at a later stage.

When approaching venture capitalists it’s important to bear in mind their industry and geographic preferences, as well as the stage at which they may be prepared to invest. Ignoring these basic criteria will often lead to disappointment for the applicant.

Venture financing will also mean giving up a sizeable chunk of the company’s equity (although rarely a majority stake-holding). This means that the VC firm will be a business partner, which in most cases has significant advantages to the underlying enterprise.

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Private Equity

Private Equity firms have similarities to Venture Capitalists. In fact, the two types of investor are often considered one and the same and in some situations their paths do cross.

However, if you read the above explanation of Venture Capital, you will know that Private Equity Firms are primarily interested in companies that are already established, have a successful product or service, but may be lacking in financial performance. Private equity firms can step into such companies to reorganise and restructure them to increase performance.

Very often, private equity firms can be utilised in the capitalisation of brand new companies. Typical of such companies are those that have been established for a specific purpose. For example, the development of infrastructure projects such as Airports, Ports, Hospitals or major property developments. Also, these projects will be operated by a consortium of well established companies and will have the support and approval of local, regional or national governments. Clearly, to a private equity firm, this would be similar to investing into an existing company with a proven track record.

That said, there is an increasing appetite for private equity investments into smaller enterprises covering a wide range of industry sectors. The key to attracting private equity at this level is to ensure that your market is well researched and that your key people have a good background in the proposed industry.

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Special Purpose Funds

Special Purpose Funds are funds that have been created to attract investment into a specific project or business enterprise under very clear-cut investment terms.

SIBC can establish special purpose funds for a wide range of projects including property development and/or acquisition, manufacturing facilities, hotels, and agricultural projects.

Special Purpose Funds are established under the umbrella of a Limited Liability Capital Partnership or Limited Company where individual or institutional investors purchase shares in the fund. The fund then invests directly into the underlying project. Funds of this type must be professionally managed and administered. The General Partner of the Capital Partnership is charged with the responsibility of adding value to the investment pool, so will be instrumental in providing a high degree of managerial expertise within the project.

This type of structure is often used when a business or company is based in a jurisdiction with overly complex corporate or investment regulations. Under these circumstances a Special Purpose Fund is established in a tax-efficient jurisdiction with a simpler and more familiar corporate and investor regulatory regime. This then allows investors to focus on the underlying business proposal, leaving the fund administrators with the responsibility of dealing with the investment complexities of the jurisdiction where the business will operate.

“With the exception of the laws of nature, nothing in this world happens until somebody sells something to someone else”.

Sending a detailed information memorandum or business plan to an investor isn’t selling - it’s informing. Real selling is when you put a visionary value proposition in front of an investor who has been specifically chosen to see it.

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