The value of Private Equity as a wealth multiplier

by Moris Beracha

Private Equity objective is to finance business projects that do not have the alternative of obtaining resources through capital markets or banks.

Moris Beracha.- Among the advantages of this type of financial assets are to create value in the medium and long term, to achieve a profit that is obtained on an annualized investment of between 20% and 30% in an average of 5 years, and the possibility of having participation in the management of private or public companies.

Change is the golden rule that boosts growth and therefore wealth. In today’s world, with new players leading the thrust of the world economy – as is the case in China – and in the midst of a general fall in commodities, Private Equity or Private Venture Capital Funds are made more visible by their high potential to revitalize and multiply private capital.

Private Equity by definition is a financial asset that began in the United States in the 1950s. Its objective is to finance business projects of any type that do not have the alternative of obtaining resources through capital markets or banks.

In the 1980s Private Equity experienced major growth as long-term institutional investments such as pension funds, insurance companies, foundations and university endowments began to leverage.

In this way, Private Equity began offering capital to private companies with high growth potential in exchange for controlling a percentage of the companies they are financing or their shares.

There are three advantages to investing in Private Equity funds. The first is the opportunity to create value over medium- and long-term capital. The second is the benefit obtained: the annualized return on investment is estimated to be between 20% and 30% over an average of 5 years. The third advantage is the possibility of having participation in the management of private or public companies.

Companies are always in search of capitalization for new projects. The dream of every company is to create value; and in the end even if it is private or family origin-always long to become public through an offer and stock market listing.

There are at least two ways to see and participate in this financial activity. The first is when the companies that are being born resort to the so-called venture capital – a subcategory of the activity of Private Equity – for the investment needed in their ideas and innovations.

The second is when the company is active and has a track record of about two or three years, and it is there when a Private Equity Fund can be approached. At that level a company knows where it wants to keep growing and how it should guide such plans. The fund is then responsible not only for recapitalizing the company, but it can engage in the financial affairs of the company, depending on the interests of the parties.

How is it done? The first thing that is established is what will be the shareholding position of that Private Equity Fund within the company. There are funds that only assume 10% of the total and others take more than 50%. Everything depends on the business route that is marked.

I usually recommend that the top management of the company that decides to grow through a Private Equity Fund participates in the process by acquiring shares of that company. This not only provides fidelity but also makes the process much more interesting. When I am asked: What do I like most about this type of financial activity? I answer: The creation of value. It is this value that will make this company different, not only because of its philosophy, its way of facing the world, and the multiplication of its wealth, but because those who are part of it will be sure of where it wants to go and how they want to get there.

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