Investing into private companies can be incredibly exciting pre-IPO not only because of the lucrative return potential, but also because the experience of joining the management teams on an eventful journey, watching the companies overcome hurdles, and grow from an idea to ultimately achieve commercial success against the odds, can be far more compelling than owning a very small sliver of large public companies who have already been on that journey decades ago.
Typically, the domain of hedge and pension fund managers, investment bankers and professional investors, private equity is widely unavailable for the individual investor due to a lack of access and traditionally high capital investment requirements. An increasingly educated private investor landscape paired with founders being more openminded to alternative forms of fundraising has opened the doors of high growth exits to HNW and sophisticated individual investors in recent years.
There are a multitude of sectors to choose from, including for example healthcare, logistics, IT, communications, construction, business services etc. Invest into a sector that you are confident will continue to grow over the next decade to increase the likelihood of a profitable exit for your chosen companies.
You can invest into private companies at all stages of their lifecycle. Ensure that the exit strategy of the businesses you invest into are aligned with your personal financial objectives. If you are investing for a retirement within the next couple of years, it may not be the most sensible approach to tie up large sums of capital in brand new startup businesses that may not achieve an exit for many years to come. If you have a five to ten year horizon, then private equity can be an attractive way to grow your wealth dramatically with a long-term approach.
Research the management team. Whilst past performance is not an indicator for future returns, it can inspire significant confidence in investors if members of the management team have had experience running similar businesses in the past and it is especially attractive if any of the team have achieved exits with other companies prior as it demonstrates capability and an awareness of the gravity of the task that lies ahead.
Business model – do you understand it? The number one golden rule of investing is ‘only invest in what you understand’. Buying into hype and making investments purely based on trends is a surefire way to gamble away hard-earned savings. All investments carry risk, so it is important to make sure they are calculated ones. Ensure the business model makes sense and that the company clearly demonstrates unique selling points (USPs) compared to the established competition. Going into any marketplace without a compelling differential factor is a recipe for disaster.
Make sure there is an exit strategy. Most private companies intend to either sell to a larger competitor, private equity firm focused on corporate buyouts, or list on a stock exchange. Check to see what exits have been achieved by companies in the same sector to see how practical the management teams expectations are.
Sense check that projections are realistic. A company projecting to achieve an eight or nine figure turnover within the next three years without strong financial backing or a very compelling argument is at best overly optimistic in their projections and at worst, naive to the challenges faced by startups and lack the experience and skill to navigate that journey.
