Private equity firms are big business globally. They are responsible for some of the biggest startup successes we see today in the startup world, from a financing perspective of course. Far removed as we are from Silicon Valley there is a case to be made for private equity firms in Zimbabwe. We have quite a few that exist at different scales in Zimbabwe. So what does it take to start a private equity firm in Zimbabwe?
Private equity firms are investment vehicles, usually incorporated themselves (more on this later) that invest in other businesses. They invest in both unlisted and listed firms and the strategies vary. Venture capitalists are a good example of a private equity firm. They invest in nearly stage startups to finance them through their growth and reap the benefits of appreciation in value. They tend to have a membership of high net worth individuals who want to participate in the ownership of companies but would like to do so with power or influence. In extreme cases, these organisations can completely take over their investment targets with the goal of improving the company.
The best structure for a private equity firm in Zimbabwe is incorporation and there are few reasons why. Firstly the company structure comes with the advantage of separate legal entity status which means the firm can enter agreements in its own right. There’s also the matter of limited liability which comes in handy in the case of risky investments which is something private equity firms engage in. Companies in Zimbabwe also enjoy the benefit of paying no tax on dividends coming from other Zimbabwean companies.
Certain skill sets will be essential to the success of your private equity firm. You will specifically need a business analyst, a legal eagle and investment broker. These people do not have to necessarily go by these titles but they will be responsible for assessing investments, keeping your operations legally compliant while negotiating the best deals and bringing investors into the firm respectively. These services can be outsourced to start with.
Aside from a few extreme cases, private equity is a long game. You buy into a company or business and your benefits come through investment appreciation and maybe dividends. Maybe because dividends are not a feature commonly associated with growth-stage businesses. However, investments in listed and mature businesses will tend to pay dividends. While investment appreciation brings growth in the investment valuation this appreciation can only be realised when you sell or divest. In venture capital, for example, it is customary for the firm to cash in when the business goes public.
There are other activities that private equity firms get engaged in that are a little more hostile but bear fruits. For example, a private equity firm can see a business with good potential but does not believe in the management. Therefore they buy into the business and use their influence to change management. In other cases, private equity firms have acquired listed firms and delisted them. Private equity firms differ from investment vehicles like hedge funds that are happy to invest without participation. Private equity firms tend to tinker with management and will move for a controlling interest from the start. They get active in the appointment of management of the companies they buy into.
The activities of private equity firms are capital intensive and generally have a long term horizon. Your membership must be made up of people with patient capital and lots of it to spare. Private equity firms are not limited to investing in other firms and may also enter arrangements like joint ventures.