Private equity for the SME

Private equity can be an answer for a company that is doing well and wants to expand regionally across borders. A private equity investor can add value with both capital and expertise.

This expertise could be in terms of acquisition advice or strategic advice on how best to take a company forward, either to expand regionally or to perhaps an eventual IPO.

'We are interested in investing in well-managed, profitable businesses with a solid track record,' says David H. Price, Director of HSBC Private Equity whose $118 million fund has been open for more than three years.

'Apart from capital we see one of our strengths as being able to advise the firms we invest in on the right way to approach a new market. Issues which we assist with include for example: Who should be the right partner in the country concerned? Should one set up from scratch or buy into an existing player in that country? What banking facilities would make sense?'

Extensive banking network

HSBC has an extensive network in the region and we make use of these resources to assist our investee companies to grow and maximize their profit making potential.

Mr. Price explains: 'Since we are part of the second largest financial institution in the world it obviously gives us some clear advantages in helping companies to expand both regionally and overseas. As a shareholder our interest is normally far more direct than that of a third party adviser.

'Indeed, having experienced private equity investors on the board provides management with an independent apolitical view that is often missing in a SME. We offer a good deal of strategic input and help management plan for the whole of the business cycle. Our interest is in investing in businesses that are robust and which can handle both the ups and downs of the business cycle.

'The role of a private equity investor will include getting involved in good governance and ensuring that accounts are kept to international standards. We undertake extensive due diligence on companies we invest in. The results of this due diligence can help ensure that a business is not only a properly constituted legal concern with appropriate legally enforceable contracts but that any weaknesses that have been identified can be and are addressed quickly.

'This might include putting in place more robust employment contracts, taking out key man insurance or just ensuring the basic IT systems are properly documented and backed up. Typically this is the sort of general tidying up and good governance that companies often leave aside while they concentrate on growing their business.'

The advantages of having HSBC as a private equity investor thus boil down to enhancing the ability to grow, ensuring good corporate governance and having an experienced financial partner who can provide apolitical strategic advice. There is also a fourth advantage that stems partly from the first three: the ability to sell a business in due course is enhanced.

Exit strategy

'HSBC is ideally placed to find a buyer for a business, whether regionally or internationally,' explains Mr. Price. 'We help to optimize the timing of a sale; we also believe that potential buyers will take comfort from HSBC's presence as a shareholder in assessing the transparency and integrity of the management structure and the business in general.

Typically HSBC Private Equity looks to exit its investments in four to five years, which could be to a third party or via an initial public offering depending on the size of the business and the ambitions of the other shareholders. 'We free up the entrepreneur to get on with the business and act as an impartial partner with sound business experience,' says Mr. Price.

The only bad news about private equity for SMEs is that HSBC can afford to be 'very selective' about the companies that it invests in, and guards its reputation carefully. For HSBC realizes that having its name associated with a company is valuable for all the parties involved.

Thus Mr. Price concedes that HSBC Private Equity may not suit every fast growing SME and that there are plenty of other private equity funds now operating in the region that an SME might find more appropriate to their particular needs. But in today's dynamic business environment in the Middle East private equity is an option worth exploring.