Private equity offerings are popular sources of funding for start-up businesses that want to avoid the red tape, regulatory hurdles, financial disclosure requirements and the costs associated with public markets or more likely, are unable to meet those requirements.
They therefore look to friends, family or other investment “angels” to raise capital for their proposed venture.
While it’s possible to achieve high returns from such investments, the odds are overwhelmingly against it.
Management Is Key
No matter how great the idea, success will be based primarily on management’s ability to execute. To bring an idea from concept to success requires a high level of planning, attention to detail, focus, persistence and execution…a rare combination of talents. Causes of failure range from overconfidence and lack of experience to the tendency to underestimate costs and overestimate sales.
It will be necessary for you as an investor to have ongoing contact and interaction with management, to ensure that they remain on track and use the invested capital wisely. Are you up for that? Does your experience and background allow you to do so with confidence?
Insist on Being Given The Detailed Paperwork
If the company’s management is reputable, they’ll willingly share with you their business plan, audited financial statements, subscription agreement and shareholder agreement. They’ll also share written documentation regarding the length of the deal, the exit strategy, how you’ll be repaid, your voting rights and the rights of other shareholders (including management).
Insist on receiving this information in writing and have it reviewed by your lawyer, accountant and financial advisor before you write a cheque.
Be Aware and Be Wary
- Let’s face it, you’re probably being approached to invest because the company and its principals have been turned down by more traditional sources of capital. Does that bode well for its future success?
- Ask yourself “Why me?” Is it because you’re known to have expertise in the proposed business (one reason people are typically invited to invest. Or is it because of your name and profile, and the principals think your involvement will help them raise more capital (the other reason people are usually invited to invest)?
- Unlike owning stock in a publicly-traded company where you can sell your shares at any time (ie. you have liquidity), there’s no open/public market for private equity shares. You cannot sell quickly, and need to know that your money will likely be tied up for a long time.
- Ongoing access to capital is the single biggest challenge facing almost any business owner. So when they have difficulty in raising more, don’t be surprised when you’re asked to put up even more capital, before you get any money out.
- Historically there is only a 3% likelihood of a private capital venture being successful… a 97% chance of it failing! If you were trying to cross a busy street, and were told in advance that there was a 97% chance that you’d be struck by a fast-moving vehicle while trying, would you still give it a go?
- You don’t need to hit home runs with your investments. Your contract is your home run! You should continue to focus on achieving singles and doubles, as you’re already doing by using a balanced portfolio of publicly-traded stocks, bonds and cash.
- If you’re nevertheless determined to in make an investment in a private equity venture, we strongly recommend you limit your exposure to a maximum of 5% of your portfolio.
The material in this document is intended for information only and not to be used as offering specific tax, legal, financial, investment, or other advice. ONE Sports + Entertainment Group in conjunction with The Pro’s ProcessTM offers this information to our clients to help them be better prepared to meet all the challenges associated with being a professional athlete in North America.