Private equity investing

One of the most profitable ways of investing and generating an additional stream of income is through private equity. Its return on investment far outstrips returns from money or stock market assets. There are established private equity firms that invest large sums of monies in large startups and we can replicate that business model on a smaller scale. Owning a business is the best way to generate enduring wealth. The world’s richest people are those who own their own businesses. Even in our communities, the business people are by far the richest (if you disregard those who got their wealth from corruption and embezzlement). From these ones, we can see that business ownership generates the highest return on investment of all asset classes. However, if you are unsure of the type of business to invest in, or you do not think you have developed the entrepreneurial skills to run a business, then private equity is a middle ground where you can as it were “have your cake and eat it.”

Private equity investment involves identifying businesses in your community that are doing well, buying shares in them and so becoming a part-owner, just like it is with stock exchange traded companies. This way the business gets interest free money for expansion and growth and you get an additional source of passive income (income earned with minimum work). Many businesses are in dire need of funding, bank loans are too expensive. If more of us could invest in private equity, our communities would flourish through increased employment, higher productivity and prosperity.

• Buhari’s ministerial list uninspiring, waste of time ― PDP

Like with all investments, you must conduct a due diligence exercise before parting with money. I recommend using the appraisal methods that banks use – the 5 Cs; character, capital, capacity, condition and collateral. Thereafter, ensure that documentation is completed and registered appropriately.

The first of the 5 Cs is character. You must ensure that the current owner-manager of the business is a person of impeccable character with similar ethical standards as yours. She must be a person you can trust. Even though trust would not be enough, and you must ensure good corporate governance structures are in place, yet trust is essential so you can have peace of mind and avoid unnecessary suspicions. Capital is the second consideration. How much money has the owner invested already? If she is not more financially committed than you then, she may not be diligent in managing the business. Financial investment is an indication of commitment. Next comes capacity. Is the owner-manager technically competent to manage the business? Has she demonstrated the soft skills required to manage staff and customers? How about the entrepreneurial skills to manage supply chain, business risks etc.? Zeal and sincerity cannot replace competence, ensure you judge capacity with dispassionate eyes. Condition is another factor to appraise. This includes location, staff, structures, internal control etc. Is the area prone to insecurity or flooding? Is there sufficient internal control in place or is stealing rampant? How about staff discipline? Is the cashier her senior brother-in-law whom she dares not discipline? How accurate, up-to-date and safe are the company records? The fifth C is collateral. Since you are becoming a part owner, you cannot ask for collateral, but you can ask for a say in the decision making that would enable you safeguard your money. For instance – credits can only be taken with your written approval or expenses above a threshold require your written approval. If your employer allows it and your investment is large enough, you should ask for a seat on the board of directors.

After the 5 Cs Test, document the investment via a shareholders’ agreement that enumerates the investment’s terms, conditions, responsibilities and privileges. Each party should employ separate legal advisors who would ensure that the agreement signed is all-inclusive and adequately protects everyone’s interests. Then register it with the corporate affairs commission (CAC).

As a private equity investor, not involved in the day-to-day running of the business, your main avenue for monitoring your investment is by reviewing the company records frequently. Ensure a good recording system is in place, preferably cloud based, that records production, sales and financial transactions. Review it diligently and give relevant feedback that demonstrates you have done a detailed study of the records.

The community around us needs investment, we cannot wait any longer for others to help us. No more parking our funds in easy money market instruments. Let’s invest in our communities.