Which investor suits which company?
Specialist articles by Alexander Eichner, perspektive-mittelstand.de, 08.09.2014
The increasing unpredictability in the financial markets and in the loan allocation policies of banks, is making alternative forms of funding, such as raising capital via shareholdings, more interesting for businesses. The structuring of a company’s shareholdings should however be carefully thought through. For: one investor is not the same as the next.
The first question - regardless of the structuring of the shareholding - is: financial investor or business investor?
In the past everything was straightforward. Thirty years ago, if the owner of a medium-sized company needed capital, he would contact his bank to get a loan. Today – after two economic crises, one financial crisis and three Basel reform packages – the world looks a bit different, considerably more complicated for the entrepreneur. The banks have become very reluctant to grant loans; they now only support low-risk investments. The entrepreneur has to look around for other funding possibilities. Fortunately, there are many such opportunities available.
The federal and regional governments and the EU all support investment plans of medium-sized companies with over a thousand funding programs. It is, however, a mammoth task to fight your way through them or an outsourcing issue for specialists. It is a similar story with a whole range of alternative funding models. It is now possible for a medium-sized enterprise to choose from a variety of opportunities to finance its projected operations or compensate losses. In addition there is the possibility to bring in new shareholders to raise capital. The entrepreneur just has to answer the question: who and how should they be the new shareholders? For the range of possible investors is vast: starting with family members, employees, business partners, suppliers and customers, to creditors, and affiliated companies, funds, financial investors and strategic investors. The first-mentioned options are based heavily on trust and business culture. The latter options require the entrepreneur to consider carefully what the consequences might be of an investor joining the company.
Financial investor versus strategic investor
Financial investors tend to pursue completely different objectives to strategic investors and consequently operate differently. Financial investors have a clear aim, which is to achieve the maximum possible interest on the capital invested. Their involvement is not usually long-term, typically limited to a maximum of 5 years. Hence such financial investors are only really interested in enterprises, where the company value is expected to increase in the short term.
This tends to deter most entrepreneurs, which is not necessarily a disadvantage. Because the financial investor is generally only interested in the relevant key figures of the company, the potential appreciation in company value, growth opportunities and the refinancing potential, he keeps out of business operations as far as possible. Therefore the target company does not have to fear interference in its day-to-day business. As financial investors generally prefer a wide dispersal of capital, they rarely strive to obtain a majority share in a company, but are usually satisfied with minority shareholdings.
This is a very different picture with strategic investors. Primarily, they are looking for solutions to strategic gaps in their own business projects. They are searching for the “strategic fit”. For this reason they strive to secure the greatest possible influence on strategic decisions and organizational set-up and therefore aim in principle for a majority stake. This limits business freedom, but can, by all means, be an advantage. For strategic investors on the whole tend to have a great interest in the long-term success of a business. They do not solely focus on profits, but mostly anticipate additional effects, such as access to the know-how, the experts or the technology of the company, and to its distribution network or products. It is not unusual to find strategic investors establishing, via shareholdings, access to other branches or utilising synergy benefits to reduce their own costs. Strategic investors are generally from the closer market environment of the company seeking investment, they are either competitors, customers, business partners, suppliers or a company operating in a related market segment.
Bearing in mind the differing aims of financial and strategic investors, every entrepreneur or shareholder should carefully assess to what extent his own objectives coincide with and compliment those of the respective investor and he should examine closely which type of investor would come into consideration for his business.