Investing in Private Companies

Have you ever overheard friends or colleagues talking about the great companies they’ve invested in? Or maybe you’ve listened to them bragging about what an amazing return on investment they’ve achieved or how cool the businesses are: a trendy boutique bistro pub, a new micro-brewery, a designer watch company supplying celebrities and famous footballers, the latest app for young savvy tech travellers and party organisers?

You only need to take a casual browse through influential websites and publications to know that there is a massive global shift in investment trends.  Investing directly into private companies that leverage technology or take advantage of the latest trends is big business.  If you can invest in early financing rounds, you can often make your money back many times over.  Spotify, Transferwise and Revolut have all been major recent successes, to name but a few.

But have you ever thought to yourself “How do I find these companies and how can I invest in them and get some of the action!?”.  In this low interest rate environment, ultra and high net worth individuals are looking for not only the next Uber or WhatsApp investment, but are also interested in potentially being involved in helping the companies they invest into.

At the moment, there is a fast-growing trend for the affluent investor turning to private companies for new and exciting investment opportunities. Here we look at the risks, considerations and potential benefits to direct investing.

Stock Markets and Private Companies

Historically, the stock market would have been the go-to place for investors seeking alternatives to cash, but for some people its investment fundamentals are looking less solid. The start of this year was marked by significant stock market volatility, which caught some investors on the hop. The FTSE100 has been through a period of steady growth and low volatility since 2009, which has led to many of its constituents now being seen as potentially overvalued.

For ultra and high net worth individuals, private companies can be an attractive alternative. Although they are often seen to be riskier than their stock market-listed counterparts, new and innovative businesses offer exciting growth potential, especially as they have the ability to harness new software and technology to accelerate their businesses in timescales that could not be achieved before.

Capitama, a direct private investment platform and network, was launched specifically to meet this growing investor demand and to help companies raise capital more efficiently than their current channels. This way, they can spend more time focusing on building and growing their business.

Start-ups have taken off

There has never been a better time to invest in private companies. Over the past few years the number of start-ups and scale-ups in the UK and across Europe has soared, meaning investors have more choice than ever before.

Each year, thousands of new potential investment opportunities crop up, with more than 660,000 new companies formed last year alone. This has been helped, in part, by the Government’s desire to position the UK as a great place for start-ups to do business.

As a result, it is now far easier and quicker to set up a business in the UK than in other countries in Europe; corporation tax has been reduced to 19%, and the Prime Minister has pledged £2 billion by 2020 for projects and businesses conducting research and development of cutting edge technology.

The impact of this new technology should not be understated. It has revolutionised the world around us and allows businesses to make real-time decisions that have an instant impact. Digital disruption has helped companies innovate and has transformed the way many companies work.

However, despite government initiatives to help small businesses, it remains incredibly difficult for these companies to access funding from traditional sources. High street banks have been wary of providing finance since the credit crunch of 2008, particularly to businesses that do not have a long trading record. Plus, if banks are willing to lend, they tend to ask for personal guarantees from the business’ owners and set interest rates at higher levels than those charged to larger, more established companies.

This is obviously a major barrier for thousands of entrepreneurs who are starting and developing their companies. As a result, many small companies are turning to private investors as a way of accessing much-needed funding.

How to invest

Investing directly in private companies is a growing marketplace. It is also an investment theme that differs from what a traditional wealth manager or private bank would provide. Most wealth managers will naturally focus on listed securities, private equity and hedge funds, money market instruments and structured products to help drive returns.

As a result, wealth managers and private banks aren’t set up with the necessary infrastructure or resources to analyse investment into private companies as a focus. The risk profile of investors investing in private companies, versus those investing via wealth managers, is also often very different. Private company investors tend to accept more risk and expect higher returns.

Investing alongside experienced professional investors such as private equity and venture capital firms, or with other high net worth individuals or Family Offices, helps to share the risk and in some cases the due diligence that investors might need to take in order to assess the suitability of a company to invest into.

High growth businesses that have experienced management teams and high quality existing investors are key indicators of historic and future potential success.  Therefore, by focusing on these co-investment opportunities, new investors can take a lot of comfort from the due diligence that existing investors have already completed, as well as the fact they have invested in the business, which provides the best statement of their belief in the company.

The stage of development, adoption rates of users, turnover and other financial metrics of a private company can help to define how risky and also how lucrative a direct company investment could be. When an entrepreneur first starts up a business it is referred to as an early stage opportunity, and the investment stage is called ‘angel investing’. After the start-up phase comes ‘growth investing’ – where a group of experienced investors or ‘venture capitalists’ offer growth capital and operational assistance.

This may be followed by ‘mezzanine investing’, which consists of equity and debt financing, and then ‘private equity’. In general, the investment risk reduces as the company becomes more developed and profitable. Capitama’s platform includes both early-stage and growth opportunities.

Aside from the company’s maturity, other considerations include whether it is pre- or post-profit and which sector it operates in. Companies in the infrastructure and renewables sector, for example, are often asset-backed and have long-term revenue contracts.

There may also be buy-out opportunities, where individuals can invest with private equity professionals to acquire established businesses. Another option is turnarounds, which offer the opportunity to invest with professional turnaround investors in businesses that require positive change to achieve their full potential. Capitama is currently seeing huge interest amongst its base for this type of opportunity.

Seeking out opportunities

There are thousands of companies that require financing, which means finding the highest quality businesses can be a daunting task. This is where a private company investment platform can help. Platforms such as Capitama let investors set their preferences so that they only see and get alerted to investment opportunities that are of interest to them. This drastically reduces the time they need to spend on sourcing and assessing deal flow. In addition, it makes the screening and due diligence process far more efficient, which means that investors can put their money to work a lot more quickly.

Capitama offers investors a broad range of investment types to cover all the main areas of private capital investing comprising: Early stage, Growth, Buy-Outs, Debt & Income, Real Estate, Private Equity Funds, Infrastructure & Renewables, Turnarounds and Social Impact & Philanthropy. When an investor registers, they can therefore choose what investment types are of interest to them as well as what sectors.

This helps to ensure that investors only see opportunities that are of interest to them, which saves a great deal of time when most are very busy. Moreover, by using Capitama, an interested investor can communicate directly with the company management team or private equity firm, to answer any questions they have and arrange a call or meeting prior to making an investment decision.

Capitama also offers investors the opportunity to donate capital to social impact and philanthropic projects in areas such as education, healthcare and the environment. For example, City Harvest is currently seeking funding to expand its operations. It regularly delivers to over 130 community programmes, providing 23,000 nutritious meals a week to those living in poverty in London. Using Capitama, it is seeking £2.5m of additional investment.

There’s no cost to access the platform, and there’s even the chance to co-invest alongside experienced investment sponsors and benefit from their expertise and due diligence.

The alternative approach

Investing in private companies offers an alternative way for investors to create wealth in their portfolio. It’s also a useful diversification tool, as returns are not closely correlated to traditional assets such as bonds and listed shares.

Innovations in the market have also made the leap into this sector much less risky. Driven by digital innovation, creative concepts and a diversification of investment themes, today’s investment landscape is incredibly rich and varied. With low interest rates and the business financing shortage unlikely to abate any time soon, now is the perfect time for high net worth investors to explore the private company sector.

Capitama was launched with the dual aim of widening the investment pool for companies and also expanding the opportunities available to investors. From the outset, the company’s mission has been to drive and improve the efficiency behind capital raising and capital investment decisions across private capital markets.

Capitama currently has access to over 7,000 global professional and sophisticated investors with over £7bn worth of annual investment capacity available.  The company truly believes that it is just scratching the surface of what it – and sophisticated investors – can achieve. More than anything else, it is excited about helping companies grow and develop and providing investors with interesting, strong businesses capable of sustained growth.

Case study:

Simba Sleep is one of Europe’s fastest growing consumer brands. The company only started trading in February 2016 and since then has sold over 125,000 mattresses, generating cumulative net revenue of over £50m. In this time Simba Sleep has become the number one online mattress brand in the UK and France and the business now operates in over 12 countries.

Capitama helped the company raise investment in its last two funding rounds (convertible loan note and Series B) from high quality lead investors for their B round and other UHNWI and family offices from Europe and the Middle East.

The efficiency of the model was proven within eight weeks of commencing marketing, when – during the Series B round – Capitama secured a £10m investment from a European family office.

Supporting Simba Sleep over multiple rounds is showing how Capitama can help fast growing companies raise capital from increasingly larger investors across the globe as they need more capital to continue their growth.  Capitama is now engaged in supporting Simba Sleep’s current Series C funding round.

By Brett de Bank and Simon Ramery

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