Unlocking Value: Proven Best Practices in Private Capital Investing
Most investors are familiar with how private equity (PE) works. Firms invest in well-established private companies, with the goal of solid returns for their investors. It takes time and patience.
Solyco Capital is taking a different approach. By taking the same patient capital along with more traditional PE style hands-on management, we’re applying it to growth-stage companies – the type of companies usually targeted by venture capital (VC) firms.
There’s room for opportunity between the traditional PE and VC models. This space in between PE and VC has strategic benefits for both disruptive companies and investors. It offers companies in early-stage growth mode a critical combination of capital and leadership support. It’s also a sweet spot for investors looking for potentially higher returns with PE’s risk-managed approach.
In PE, returns usually come from selling the invested asset at a higher valuation or steady income through dividends. Opting for firms focusing on this hybrid approach can mean smarter portfolio management, translating to the potential for increased growth and, consequently, higher returns – especially in early to growth stage companies.
Strategies for Maximizing Returns
I’ve worn dual hats of investor and business owner for nearly a decade. The journey is one of continuous learning and integrating experiences for better results. Here are my observations for how to think through an investment and navigate a dynamic business landscape.
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1. Conducting Effective Due Diligence
Invest in what you know and what you understand. Investments can take time; before committing capital, do your due diligence. Talk to the firm (or firms) you are considering. Explore their investment thesis and the company or asset they are currently raising capital for. Like any big decision you make about your money, health, etc., asking the right questions is critical to deciding where to put your private capital.
When looking at a deal or firm to invest in, here are some factors I like to consider:
- Do I understand and believe in what I am investing in?
- What does the next 3–5-year road map look like?
- What is the use of the capital it is raising?
- What factors justify its current valuation?
2. Partner with Established Firms
When you decide to go with alternative investments, you are establishing a relationship with a firm that will ideally endure. By choosing a reputable firm, investors benefit from the collective experience and expertise. This can prove crucial in volatile market conditions and help manage risk.
More than a one-time transaction, these relationships should be grounded in trust based on shared values and effectiveness. An established firm offers the advantage of leveraging its track record of successful investments. This history serves as an indication of its financial acumen and highlights its ability to navigate the complexities of alternative markets with precision and foresight.
3. Understand the Investment Thesis
Understanding the investment thesis, or the overarching strategy of the deal or fund, is essential. Different firms have focuses ranging from early to late-stage capital, real estate, and distressed assets, to name a few. Make sure the investment hold-time, risk profile and sector match your investment goals. Once you understand the fund’s investment thesis, you can decide if it’s right for your investment appetite.
The Power of Active Portfolio Engagement
Actively involved firm leaders can provide strategic guidance to help portfolio companies improve their operations and overall business strategies.
Here are some proven best practices that our team leverages through its active involvement to maximize potential returns and maintain a competitive advantage.
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1. Operational Support and Involvement
Find a firm that works shoulder to shoulder with its portfolio companies. Deep industry understanding paired with experience in a wide variety of sectors can create the perfect relationship between a company and its investment firm. Company leadership will tend to focus on its vertical and growing quickly. That is its job. The right investment firm brings a broader perspective that allows the company to benefit from practices and strategies outside its industry.
2. Strategic Capital Deployment
The capital deployment strategy within each firm is instrumental in guiding how it invests, manages risk, and generates returns, ultimately shaping its success and impact in the financial markets.
Palltronics, a Solyco Capital portfolio company, is a revolutionary smart pallet manufacturing company. It exemplifies meticulously deployed capital for rapid growth. Through a strong partnership with Palltronics, we recognized the best opportunity for the company to meet demand would be to raise a round of capital to build a completely new facility bringing all manufacturing together to streamline costs and production time. Palltronics’ new facility is located in a business-friendly region and will give the company the opportunity to change the game in pallet manufacturing.
3. Exit Strategy and Timing for Favorable Returns
Understanding how and when to exit an investment is a crucial aspect of capital deployment. This could be through an IPO, a merger, or other appropriate exit strategy. A hands-on approach, and earlier stage investing, creates a partnership dynamic that encourages early planning for exit strategies, which is essential for optimizing returns.
Private investors who invest with firms need to understand that in most cases the horizon is longer term. Patient capital allows a company to wait for the right market conditions to maximize returns.
Risk Management Strategies
Private equity and venture investments have inherent risk, and effective risk management is part of safeguarding investments, optimizing potential returns for investors, and building trust. Proven leadership at private capital firms identifies and addresses an array of risks, including market dynamics, operational issues, and regulatory challenges. This guidance helps companies in growth mode to navigate these obstacles.
- Market risks – Successful firms identify market-specific risks, such as economic downturns or changes in consumer preferences. From our perspective, this often means diversifying an investment portfolio across different sectors, geographies, and asset classes to reduce concentration risk. We have portfolio companies in agriculture, manufacturing, technology, sustainability, health, sports and more.
- Operational risks – Traditionally, firms work closely with a portfolio company’s management team to implement operational improvements and best practices after acquiring the company. Early-stage companies rarely have all the requisite operators when they are raising capital in the company’s infancy. Often, a firm will appoint experienced executives or advisors to oversee the day-to-day operations of portfolio companies and put them on a path towards predictable growth. This is a calculated strategy that we regularly leverage.
- Regulatory risks – It is important for firms to have deep relationships with best-in-class legal experts and compliance professionals to help their portfolio companies navigate complex regulatory environments. Taking a proactive approach to maintaining accurate and up-to-date records of regulatory compliance efforts and interactions with regulatory bodies is important to the long-term viability of the company.
Effective risk management in private equity involves pre-investment due diligence and ongoing monitoring and adaptation to identify and mitigate potential risks. It ultimately protects the value of the investment portfolio.
Diversification – Why It Matters
Diversification involves spreading investments across different asset classes, industries, and geographies. If one investment underperforms, the potential losses can be offset by the performance of other investments. A diverse portfolio of companies allows individual investors to vary their own capital allocation within the firm’s offerings. Some investors choose to invest in mature, proven businesses, while some like the opportunity to be part of early-stage and growth-stage companies with larger return opportunities.
Our own diversification strategy gives individual investors a balanced exposure to different risk profiles and potential returns paired with a proven hands-on management strategy.
As market conditions change, firms may need to adjust their portfolios to maintain the desired level of diversification. Solyco’s team has expertise not only in managing market conditions, but also in diversifying within different tax, compliance and regulatory considerations that can impact investment returns and compliance.
Best Practices for Maximizing Returns and Sustainable Growth
Adhering to the best practices discussed above is paramount for investors seeking to optimize returns. By understanding the questions to ask, investors can identify the best firm or firms for their personal investment strategy. Finding a balance between immediate return on capital and long-term sustainable growth is essential for a resilient investment strategy. Get to know (and trust) the firm, its portfolio companies and how they all work in partnership. Invest in what you know and understand. Most importantly, get comfortable with a forward thinking and flexible mindset. In my experience, the best investments have the right to identify opportunities and pivot when necessary and the time to execute effectively on those opportunities for the greatest potential financial outcome.
The information contained in this article is for general informational purposes only and should not be considered financial advice or a recommendation or solicitation to buy, sell or hold any securities or financial products.
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