Unlisted financial securities (private equity) and partners' checking accounts

Pagbati, ambassador! De N Zezenga, princess! Every work of GOD is GOD’s will. But not every work of GOD is His (specific) will for you. 

1. Interest-bearing savings

2. Insurance products

3. Tontines

4. Unlisted financial securities (private equity) and partners’ checking accounts

   1. Partners’ checking accounts

   2. Private equity or unlisted financial securities

      
      
      
      

❖ “Mow the grass in the fields, and while the new grass is growing, gather hay on the mountains. Keep sheep to make yourself clothes, and goats so you can buy a field. Use the milk your goats give in abundance to feed yourself, your family, and your maidservants.” (Proverbs 27:25–27, Contemporary French)

❖  “Be very careful not to say in your heart, ‘It is my own strength and the power of my own hand that have enabled me to acquire this wealth.’ Remember the LORD your God, for it is he who gives you the strength to acquire them, in order to confirm—as he does today—the covenant he made with your ancestors by taking an oath. (Deuteronomy 8:17–18, Segond 21)

A. Shareholders’ Current Accounts

Shareholder current accounts are funds made available to a company by its shareholders. The purpose is to finance the company’s growth or to provide temporary assistance (working capital, peak demand, security deposits, etc.). In return, the company compensates the holders of these current accounts by paying interest or dividend bonuses. An agreement signed between the partners and the company defines the guarantees, payment terms, and repayment terms.

Among partner accounts, we distinguish between:

• Shareholder current accounts: Funds are available for an indefinite period. A shareholder may request repayment of their funds at any time, or may choose never to do so.

• Restricted partner checking accounts: Funds are loaned for a fixed term. The partner cannot request repayment before a predetermined date.

• Locked accounts for a future increase in share capital: The funds lent are intended to be incorporated into the company’s share capital after a certain period, subject to the company’s financial situation and the achievement of certain objectives. Unlike the previous two types, these accounts are classified under “other equity” on the company’s balance sheet.

In addition to compensation and/or access to share capital, the benefit of these accounts for partners is that they limit access to capital, encourage the reinvestment of profits, and reduce dependence on banks.

B. Private Equity or Unlisted Financial Securities

In previous articles, I explained what financial securities are (stocks and shares, bonds, and debt securities). I also took the opportunity to discuss Collective Investment Schemes (CIS) and ETFs. We therefore know what financial securities are. There are other types of financial securities (derivatives, structured products, and complex instruments). I’ll discuss some of them in future articles. However, what we’ve learned from the previous articles is more than enough for this one.

In English-speaking countries, a publicly traded company is referred to as “public,” while an unlisted company is referred to as “private,” hence the term “private equity.” In France, public companies are those owned by the government or a public entity, while private companies are all others, whether or not they are publicly traded.

Private equity is the investment in the capital of unlisted companies at various stages of their development. It differs from public equity, which refers to investment in publicly traded companies. The investment (the purchase of shares) is made by individual investors, corporations, pension funds, or investment funds, also known as holding companies. 

Investment funds acquire companies or stakes in companies with the aim of gradually reselling their shares years later to realize capital gains. Some investment funds borrow money to invest, while others invest using their own capital. To maximize the company’s future value—and thus the capital gain upon sale—investors provide advice (on finance, strategy, marketing, research and development, and management) or business networks to the company’s founders and executives.

For investment funds and seasoned investors (business angels or entrepreneurs), there are five main types of private equity:

• Venture Capital or Seed Capital – Innovation Capital – Early Stage: These companies are very young and generally not yet profitable. Their business model is still being developed. Investors have a strong understanding of the industry or the technology being used or developed. They know that, eventually, the company will either become profitable or sell its discovery, product, or expertise to larger companies. The most common example is that of startups. Investors’ funds may be used to cover patent fees. This is the riskiest stage of investment, with the highest risk of bankruptcy.

• Growth capital: The company is profitable or on the verge of becoming so. Investors’ money will be used to fund marketing, increase production, develop a new product, or acquire another company.

• Turnaround capital: The investment is used to finance a turnaround plan.

• Succession capital: The company is bought out from its founders, who wish to sell and move on (to develop a new product) or are retiring. Investors aim to grow the company with the goal of taking it public or eventually reselling it.

• LBO (leveraged buyout) acquisitions: The companies are profitable and in their maturity phase. At the very least, the business model is clear. The investment is financed with debt. The acquiring investor relies on future profits to repay the debt. Sometimes investors (companies) want to acquire a publicly traded company. They launch a tender offer to gain control, delist it (if possible), and grow it without the constraints associated with being publicly traded and having multiple shareholders. For reference, a publicly traded company can have hundreds, thousands, or even millions of shareholders.

For individual investors like you and me, investing typically occurs when the company is in its growth phase. The minimum investment amount can be low or very high. The three main ways for individual investors to invest are:

• Direct investment: The company invites individuals to invest through announcements on its website, emails, or other channels.

• Investing through mutual funds: Investors invest in investment fund companies. They entrust their money to the fund.  Fund managers decide to invest in companies they deem promising.

• Investing through crowdfunding platforms: There are three types.

  • Crowdlending: Investors purchase bonds with terms ranging from one to four years.

  • Crowdequity: Investors receive shares.

  • Real estate crowdfunding: Investors finance real estate projects and are repaid at maturity with interest. The term ranges from one to three years.

Good to know for French residents: Some investment funds and crowdfunding platforms allow you to invest through traditional PEA accounts (offered by banks and insurance companies) and PEA-PME accounts (PEAs dedicated to small and medium-sized enterprises). If you’re not familiar with what a PEA is, I discussed it in the article on insurance products.

🙂 Investing in private equity involves both advantages and risks. It can be more, equally, or less advantageous than investing in the stock market. All large companies started out as small businesses in private equity. Listed companies are not entirely publicly traded (a portion is not listed on the stock exchange). These two sentences effectively summarize the potential of private equity. Crowdfunding platforms allow for collective investing. This helps spread the risk. The crowdfunding platform preselects companies (across all sectors), asks members to vote on the companies or projects they find interesting, and then raises the funds. You know exactly where your money is going.

Private equity isn’t all advantages. Not all startups will become success stories. There are success stories and there are long-running nightmares. So here are some points to keep in mind:

• Private equity isn’t for the impatient. If you want to be able to access your money at any time, this isn’t for you.

• It’s possible to lose your money or have to wait a long time before the company becomes profitable. You need to clearly distinguish between the product (or sector), the industry, and the company itself. You also need to clearly distinguish between lending money and buying equity shares. Some companies claim to be—or appear to be—in a growth phase, when in reality they’re still in the early stages.

• The number of years a company has been in business, its reputation, or the fact that it has raised significant amounts of money do not necessarily indicate the maturity of its product, business model, or management. Every investment should be a personal choice, not simply following the crowd.

I enjoy private equity just as much as investing in the stock market and cryptocurrencies. However, I do not invest with the same frequency or in the same amounts across all three types. Each type of investment has its own characteristics, advantages, and risks. Every investor has their own context, preferences, and constraints. It is up to each individual to define their own criteria and listen to their inner voice.

** Pagbati = Salut en tagalog (Philippines) et guidars (Cameroun)

** De N zezenga = Bonjour en kasem/kassim/Kasena (Ghana, Burkina Faso)