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Foundational Steps to Setting Up a Private Equity Fund

Here are some guidelines from private equity practitioners for those starting out on their own.

Erika Van Der Merwe

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Private-equity

Have the right qualifications, experience and skills set

Private equity partners should undoubtedly have university education, often followed up with complementary post graduate professional qualifications. Private equity practitioners include chartered accountants, those with MBAs or actuarial degrees, or the global Chartered Financial Analyst qualification.

They can also include less finance-specific qualifications – for example, degrees in computer science/information technology, engineering, chemistry and agriculture.

Equally important is long, hard experience in the field, whether at an existing private equity firm, or at an investment house where doing deals and managing business assets is the central focus.

A credible private equity practitioner requires deep expertise in leading investment deals through all stages of the investment cycle, from sourcing and structuring deals, to value creation and exits.

Related: Private Equity Directory

A unique investment thesis must be clearly defined and demonstrated

A private equity business must demonstrate a unique investment thesis that matches the skills set and experience of its team members. For example, if you aim to specialise in start-up technology firms, African agriculture or infrastructure, there must be the experience, skills and networks to back up this vision.

Your target investments must also be consistent with the appetite of institutional investors. Various sectors come into fashion and then lose appeal, so you have to offer investment opportunities that resonate with investors at that particular time in the economic cycle.

When the investment thesis is clearly established, only then should potential investors be approached. These discussions can be jump-started by highlighting your strong networks and business-building skills.

Get references from management of investee companies and professional services providers who have worked with you and the team in your previous positions. A private equity fund manager must also be able to demonstrate the rigour of its investment processes when assessing and then investing in target companies.

Don’t disguise failed investments you may have had; rather, transparently use these experiences to highlight how you have refined and improved your investment thesis and adapted processes.

Hand-pick your team – chemistry and passion are key to success

A private equity team is together for the long (long!) haul, so there must be complementary experience and chemistry, and a good combination of operational and finance skills. You need a passionate team to get through the gruelling fundraising process. And all key staff must have significant personal capital invested in the fund – so-called “skin in the game”, so be clear on terms that require the team to make monetary commitments to the fund.

Tap into the right investors

Private equity fund managers are ultimately accountable to investors, be they retirement funds, development finance institutions, sovereign wealth funds, or family offices, and these can be local and international. So the close alignment of the interests of investors to those of the fund manager’s investment thesis is crucial, to ensure longstanding and supportive partnerships.

Before you start talking to investors, decide on which agreement terms can be modified or changed, and which are not up for negotiation. The market for fundraising is a crowded one, with many players chasing the same financiers, so terms and structures may have to be altered in order to attract the attention of the finite pool of lenders.

For example, are you willing to offer economic or governance incentives to cornerstone or first-close investors? In rare instances, it may be necessary to turn away funding commitments if investor interests are not aligned with yours.

Nurture networks in order to build and maintain the deal pipeline

Sustainable private equity requires solid and dependable deal flow. Successes need to be replicated at regular intervals, and infrequent opportunities will deter investors.

A private equity firm must show that it will be able regularly to source attractive deals consistent with its investment thesis. This means building longstanding relationships with lawyers, advisors, placement agents, intermediary brokers, professional associations and experienced investors.

Set off with patience, and become a master of change management

Each step is likely to take longer than you expect. Private equity practitioners will admit to feeling overwhelmed and even disillusioned at times. The fundraising process can be challenging and disheartening.

Related: Private Equity vs Hedge Funds

 

Potential investments require extensive due diligence and many come to nothing. This is an industry with multiple legal and regulatory hurdles and requirements. And it can be a long journey and the time it takes to establish reputation, relationships and industry credibility should not be underestimated, and cannot be short-circuited. Have a clear short-, medium- and long-term vision for your business – while being flexible and adaptable when required.

Erika van der Merwe is CEO of the South African Venture Capital & Private Equity Association (SAVCA), a non-profit member organisation whose objective is to promote venture capital and private equity in South Africa. It has around 100 members, who collectively account for about R130bn in assets under management. Van der Merwe holds the Chartered Financial Analyst (CFA) accreditation and has a master’s degree in economics from Cambridge University and from the former University of Natal. She joined the board of the CFA SA Society in 2012.

How to Guides

Making Money Online: 10 South African Entrepreneurs Doing It

You don’t need an eight-to-five job or stacks of capital as the launch-pad to start a business and create your own source of income. Here are 10 entrepreneurs who’ve found some unconventional ways of making money online using common platforms.

Diana Albertyn

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How to Guides

Fintech And Small Business Success: 5 Tips For SA’s Fintech Start-ups

Let’s look at what the future holds and how small businesses can benefit.

Colin Timmis

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Around the world, the fintech revolution is disrupting our relationship with money, both in our personal and business lives. This global market is expected to be worth $10,499m by the end of 2018 – and digital payments account for much of this growth. This means it’s an exciting time for small businesses looking to get ahead. Whether they’re fintech developers, users or both, these businesses are putting new technologies to work and benefitting hugely.

South Africa’s small business community, like elsewhere, is embracing fintech with enthusiasm. To make the most of  this energy, new incubators and accelerators are setting up shop across the country. Cape Town, for example, hosted its first ‘Startupbootcamp’ which focused on creating scalable technology solutions for financial services and related industries. At Xero, we recently launched a virtual hackathon to enable South Africa’s technology entrepreneurs to compete with other forward-thinking developers on a global scale.

Against an energetic business landscape, fintech presents an attractive market for SA’s budding entrepreneurs. In today’s competitive business environment, new technologies are key to meeting your target audience’s needs and expectations.

So, how can entrepreneurs take advantage of what fintech promises? Let’s look at what the future holds and how small businesses can benefit.

Think smart, grow fast

The range of available fintech solutions and tools is vast. However, new technologies alone are not enough to get your business off the ground – and keep it there. Here are five tried and tested tips for small business owners to keep in mind at all times.

Related: Fintech: Fusing Finance And Technology

1. Have an idea

Entrepreneurs first need an idea, then a plan supported by realistic goals. Your idea has to be good: ask yourself what you’re going to sell, and why. Once inspiration has struck, subject your idea to some hard scrutiny. Chances are someone else is already doing something similar – which is fine if you can do it better.

2. Build a plan

Your business plan is your map. It will help you launch your idea with structure and thought, and guide your company’s progression. You don’t need to stick to your plan like glue: Flexibility is certainly a virtue. A new twist or turn – as long as it’s on the right track – could take the business forward faster.

3. Be flexible

Of course, if something isn’t working then don’t be afraid to abandon it and move on. Fear of failure often results in entrepreneurs throwing good money after bad. Know when to scrap an idea, take what you’ve learnt and focus on something new. Remember, there’s no point crying over sunk costs.

4. Stay alert

When it comes to new ideas, look at what’s old and needs refreshing. Keep a constant eye out for ways to disrupt the status quo and offer people a better way of getting what they need. Even if your business is running smoothly and doing well, if you don’t stay alert, you could lose out on some low-hanging fruit to a competitor.

5. Use technology

Startups are typically constrained by limited resources – namely time, money and labour. A solid plan will help allocate your resources effectively. Fintech solutions can provide a strong backbone that helps you enhance your capacity, manage your cash flow better and improve productivity.

Related: 6 Lessons The Founders Of iKhokha Used To Launch An African Fintech Start-up

The future of fintech in SA

South Africa is fertile ground for fintech. A lack of legacy infrastructure – particularly in outer lying areas – has created a large underbanked rural population hungry for financial services. What’s more, a growing urban middle class is demanding more sophisticated solutions to outdated forms of payment processing.

Fortunately, these demands are not falling on deaf ears. The local tech community is part of a dynamic development ecosystem that is working hard to innovate tools that provide greater financial access. With a clear gap in the market and an eager target audience, the future for fintech developers and users in SA is looking stronger than ever before.

Regardless of what your business offers, where it is based, it’s size or age, it’s time to join the fintech revolution. By embracing relevant solutions, your business will become more agile, efficient, responsive and ultimately, more successful.

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Loan Scams: How To Protect Yourself From Loan Scams

My thoughts are that only if there is a grassroots movement by people affected by these scams to get rid of these unscrupulous marketers, will there be any chance of change.

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The current economic situation we’re experiencing in South Africa has created a strong appetite for credit. Often consumers need to borrow money out of desperation just to help them survive. It is here where scam artists and unscrupulous marketers prey on the public, signing them up for services they do not need, with monthly debit orders adding to their woes.

It’s a tactic that we’re seeing more of these days: A company advertises that they can help you secure a loan, even if you’re blacklisted. They charge you for this ‘service’ and at the same time sign you up for a bundle of monthly paid-for add-ons, hidden away in the Terms and Conditions (T&Cs).

They are doing this despite the fact that it is illegal to advertise loans to those who are blacklisted (according to the National Credit Act), and that a company cannot charge to facilitate a loan (according to National Credit Regulator [NCR]). To make matters worse, in 99% of cases, the applicant is turned down, and now has to continue paying for services that they were unaware of signing up for in the first place.

Related: The Definitive List Of South African Business Incubators For Start-Ups

This is criminal behaviour, but for some reason it does not get acted on by relevant authorities (such as the NCR) which should be protecting consumers. With an estimated one million South Africans being preyed upon like this annually, those who are tasked with watching over the consumer should not shake this responsibility. That’s not to say the marketing industry is blameless – far from it, but without a regulatory body, there’s very little to be done to act on these rogue companies. Even Google benefits from these loan scammers – just type in “bad credit loans” and see how many ads pop into the paid search results.

My advice would be for consumers to be vigilant in managing their financial affairs, especially when it comes to “too good to be believed” offers. Here are some pointers to help consumers protect themselves:

  • Never give your bank details to an unknown brand or marketing company that is not your own bank or insurance company.
  • ALWAYS read the Terms and Conditions before signing up for anything. Most of these scams work because the extras you sign up for are buried in the T&Cs, making them part of the contract.
  • Never agree to pay someone to find you a loan. The service provider is conducting an illegal act, since they cannot charge consumers for loan finding services according to the NCR.
  • As difficult as it can be, do not apply for loans if you are blacklisted as there is little chance you will qualify. These scams are run by people who feed off/take advantage of people’s desperation, so rather speak to your bank to get advice about your situation.
  • Sites such as Hellopeter are a great resource to check if companies are offering fraudulent services. It will only take a few minutes, but could save you years of problems.

As for what to do if you have fallen victim to these scams, complain in writing to the Credit Ombudsman (ombud@creditombud.org.za) as soon as possible. At this stage, we’ve lost faith in the NCR or the Consumer Protection Act stopping these types of scams. Rather get in touch with Carte Blanche, your local or national newspaper, and note it on Twitter and Facebook. My thoughts are that only if there is a grassroots movement by people affected by these scams to get rid of these unscrupulous marketers, will there be any chance of change.

Related: Seed Capital Funding For South African Start-Up Businesses

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