What is private equity and venture capital?
Venture capital is a form of private equity that is predominantly used to invest in the earlier stages of development.
Venture capital investments generally carry a higher risk due to:
-The embryonic stage of the business (seed and very early stage investment)
-The investment in hi-tech companies or products which have no proven history of success
Growth equity is a form of private equity investing at a later stage (i.e. more developed stage of the business):
- high growth
- expansion
- acquisition
Growth equity is usually not invested in undeveloped technologies. However, there are exceptions when the business has established sales channels as well as customer commitments.
What is the difference between private equity financing and a loan?
Private equity is an acquisition of new and sometimes existing shares of a company after which the Private Equity Fund becomes a shareholder of the business. Unlike a lender, the private equity investor normally does not have any collateral on any of the assets of the company. If a company is underperforming or enters into bankruptcy, the other shareholders will only have the rights to claim liquidation proceeds after the lenders have been repaid. In the case of minority investments, the fund may require certain guarantees and collateral to structure its exit (i.e. the sale of shares, or other objectives agreed with the owners)
Due to the lack of collateralized investment, a private equity investor is considered to have a much higher risk compared to bank lenders, and therefore its investors require a higher return on the invested capital. Typical returns for Private Equity funds are in the range of 30-50% p.a. on the invested capital.
There are some instruments that private equity investors use in addition to simple equity which may resemble a loan and also reduce the initial risks of investing in a company. For example, loans convertible into shares (a.k.a. “convertible loans”) are implemented in certain transactions. The convertible loan provides the investor with security as well as interest payments prior to converting the loan into common stock.
How many shares would QUADRIGA want in exchange for its investment?
The number of shares purchased by the fund is determined primarily by two factors:
- Valuation of the company in relation to the investment by the fund
- The rights attached to the number of shares acquired (generally QUADRIGA requires minority veto rights comparable to those of a 25% shareholder in accordance with the Russian joint stock company law)
What is the typical transaction size?
QUADRIGA deal sizes typically range from about $4.0 to $15.0 million US. However, we are flexible to co-invest with our partners and investors in larger transactions.
At what stage of a company's life does QUADRIGA invest?
At a stage when:
- The company’s value can be determined through quantitative measures
- There is sufficient basis to assess the future growth opportunities of the company
What is the average return required by QUADRIGA?
Equity is one of the most expensive financing mechanisms. Unlike a traditional loan, it is not covered by collateral and does not require any periodic repayment (such as interest and principal). Additionally, the shareholders are the last in line in the event of bankruptcy.
Thus private equity financing is regarded to have a higher level of risk than other forms of capital. Due to the enhanced risk profile, private equity investors expect commensurately higher returns (minimum 30% p.a.) on their investments. Correspondingly we seek to receive multiples on the invested capital. It is not uncommon to expect the company’s market capitalization to at least triple within three years following the initial investment. Therefore, this method of financing is primarily suited to businesses with high growth potential and/or significant cash flows.
How does QUADRIGA exit / sell shares?
Three primary exit possibilities exist:
1) Shareholders’ buy-out
2) Sale to a third party
3) IPO
Shareholders’ buy-out:
From the onset of negotiations with companies, many shareholders tend to suggest this exit and believe it is the most common and preferable. However, in reality shareholder buy-outs are usually quite rare because i) shareholders often lack sufficient funds (and share capital is the most expensive form of finance), and ii) a conflict of interest usually develops since the private equity investor would like to sell its shares for the maximum value while the shareholders are looking for the lowest price.
Sale to a third party:
This is the most typical form of exit. It allows the investor to sell its shares and the company to obtain new capital for future development. Typically, the third party takes control over the company and therefore the shares owned by the minority shareholders are also sold alongside the private equity investor’s shares.
IPO:
The most preferable method for an exit as it enables the company to access capital markets. An IPO typically requires capitalisations in the range of USD 150.0 million and more at exit and certain qualitative criteria also required by Quadriga. Current requirements on transparency, availability of an audit history as well as regular reporting are very strict and the company must organisationally be prepared to make this step.
How long does QUADRIGA remain a shareholder?
As a general rule, private equity investors (including QUADRIGA) invest in a company for a period between 3 to 6 years. Typically it requires management approximately three years to achieve substantial growth, and after 6 years the effectiveness of an investment usually begins to decrease. Thus, 4-5 years is the optimum period for an investor to participate in the company’s business.
What are the benefits to the company’s owner and management after the investment?
- Significant amount of funds available for development (usually bearing no interest or dividends)
- General managerial expertise and access to QUADRIGA’s widespread network
- Synergies with the portfolio companies of both QUADRIGA and its limited partners
- Mitigation of business risks with QUADRIGA as a partner
- Recognition due to being supported by a widely known investor
- Motivation to improve the business in terms of sales and profitability
- Improvements of internal transparency, manageability and overall company structure
In which sectors does QUADRIGA invest?
QUADRIGA has traditionally invested in the Russian consumer products and services sectors. However, the firm has also selectively invested in engineering and high technology companies. Currently QUADRIGA is interested in the following sectors of the Russian economy:
- Manufacturing industry (automotive components production, oil and gas industry components production)
- Industrial services (engineering and construction services)
- Consumer services (travel, insurance and financial services sector)
- Consumer goods
- Media and media content
- Financial services and capital market services
How long does it take the Fund to approve the investment?
Typically it takes between 3 and 6 months until closing.
What is the procedure for the investment decision to be approved by QUADRIGA?
The following summarizes the key steps involved in our investment process:
1. Our managers get to know the business plan, development strategy as well as the executive managers of the company. It is critical that we develop a solid understanding of the business and understand the rationale of an equity investment.
2. QUADRIGA and the company’s management team/ owners discuss the investment conditions and sign a letter of intent or Term Sheet.
3. QUADRIGA managers prepare the investment proposal to be discussed and approved by QUADRIGA investors.
4. If the investment proposal is approved by the investment committee, legal and financial due diligence of the company is commenced.
5. After the due diligence process is completed and the investment conditions are finalized, the investment agreement is signed between QUADRIGA and the company.