Mr and Mrs Bank vs Private Equity Family
Banks financing professional activities is not inevitable. French banking establishment are in fact known for their reluctance when it comes to invest in new projects. There are concrete alternatives to developing an activity, and private equity is one of the most used. Long-standing among the Anglo-Saxon community, the concept of private equity has gained ground in France. French private equity is now at its highest level since the 2008 crisis, and has also become more selective.
Traditional bank loans suffer from two defects
Traditional bank loans are intended to help start-up businesses or to encourage their growth. They usually finance the acquisition of durable goods essential for companies’ operation. They can help finance their activities by meeting their working capital needs. This bank-financing approach suffers from two major defects. On the one hand, banking establishment require personal contributions, and on the other hand they are very cautious when it comes to invest in a high-risk project.
Investors increase your capital
Private equity offers a fundamentally different means of financing activities. It is based on the capital increase of the business by foreign investors. The business gets its financial capacity increased according to these new contributions. There are businesses specialized in private equity, and it’s possible to call on business angels. The latter may be investment funds or individuals in favor of the business they are going to finance.
Private equity financing is increasingly used for large business projects. It is also often used when a growing business is showing a strong growth. This type of private equity is called fund raising, and startups are very familiar with it. Private equity has only one direct side effect, which is to reduce the power of the shareholders already in the capital of the business.
A slow democratization of private equity
If it has been known to the Anglo-Saxon business world for many years, private equity took time before establishing itself in France. French businesses only had a restricted access to the profits provided by this asset class, which was formerly reserved to institutional or very wealthy bank clients. Private equity is very attractive in terms of profitability and performance.
All-size businesses can benefit from investments based on minority or majority shareholdings. It generally depends on the invested amounts. Fresh capital is brought to the top of the balance sheet. Investors expect capital gains after 5 to 8 years, they often constitute a minority of in the board of directors and do not receive any guarantee.
A financing method promoting agility
Private equity has become a preferred mean of financing for businesses. It is increasingly difficult for them to finance themselves with own funds or get a traditional bank loan. As for IPO, its complex and risky mechanism discourage more than one entrepreneur. Private equity also provides a tactical advantage. That is the advantage of agility. Indeed, bold and promising projects need only a little time to quickly get financial resources. Companies having these resources can quickly meet market needs.
Investors and entrepreneurs were not mistaken since between 2017 and 2018 private equity increased by 13% in France. It reached nearly 20 billion euros. In terms of annual performance over 10 years – between 2008 and 2017 – private equity is obviously leading with 6.3%. CAC 40 only brings 3.2%, real estate 4.5% and hedge funds only 2.7%. What is of course interesting for investors is also interesting for businesses wishing to obtain financing. Especially since private equity has a profitable taxation.
The right approach to attract investors
Once they have properly identified their needs, businesses can call on financial investment agents to help them call on investors. This is a process they have to initiate to fully benefit from private equity. From now on, the action takes place in business incubators, startup accelerators and co-working spaces. Your business plan must be effective and convincing, it validates your economic model and follows the strategy of the business.
Feel free to get the help of a lawyer to create a legal record. The help of communication experts helps to get the interest of financial investment agents. First of all, you need to know your market at your fingertips. Be specific whether you want to use venture capital funds, innovation capital or solicit capital for the development of your business or for its restructuring. The private equity market is moving forward in France. Investors are as motivated as ever but increasingly selective.
