When you put yourself into the shoes of a private equity company four points shall be highlighted:

1. Private equity companies usually lend money for 10 years, promise 20-30 return on investment each year and pay back their investors at the end of the fund life time. The management income consists of a fixed salary and a variable upside depending on the performance of the fund. While the entrepreneur is aiming for long-term profit, the private equity company sees itself as accelerator with a limited holding period.

2. Depending on the size of the fund and the number of managers, it is possible to calculate the number and size of investments which a given private equity fund could make. While the entrepreneur concentrates on the investment needed to start-up, the fund is focussed on diversifying the risk within its portfolio and the work load for each investment manager.

3. While the entrepreneur thinks about which markets target on and how to highlighting a unique selling point, the main concern of the private equity fund is the number of years the competitive advantage is worth.

4. While the entrepreneur focuses on the timing of getting the product/ service to market, the private equity company is thinking about the timing of the capital markets and whether a similar business model has just been funded which would threaten the success chances of the new start-up attracting financing.

To conclude, for a financial investor the key questions to evaluate the business plan are: Is the story interesting? Is the financial potential attractive? And is the timing right? He/she will assess all three questions on the basis of relative risk. To create wealth for everybody, there shouldn’t be too much focus on the current valuations of a company but an understanding of the value drivers for future success and the contribution from both parties to it. Linking this to valuation will clarify the benefit and will align the objectives of both parties.

Christoph Burger
Head of Practice Group
ESMT Customized Solutions