Strategic Objectives
While securing good financing and seeking the right capital and debt structure on the balance sheet is a fundamental issue for any multinational corporation, it is even more important to get it right the selection and management of the core business and its returns.
In the search for profitable growth among the core business activities and lines of business, it would be helpful to make the most of all the strategic knowledge that the Multinationa has, both internal and, above all, of the market and the value chain as a whole: What if we could drive the transformation of our customers, distributors, suppliers and key technologies or capabilities, without having to put our balance sheet at risk or alter the structure of our core business?
There is a strategy for doing so; co-investing in the ecosystem of suppliers, distributors and customers by participating in Corporate-Sponsored Funds.
Implications for the Multinational Corporation
These funds take the form of any other private equity fund, except in several important respects:
- The fund management team is partially affiliated with the multinational.
- The multinational contributes minority capital to the fund, always less than control.
- However, the investment objectives of the Fund are defined by the Multinational, according to its vision of the evolution of the market in which it operates and its supplier/customer typology needs.
Interest for Private Equity Investors
Professional private equity, financial PE funds, participate with majority contributions, together with other institutional investors, adhering to the investment objectives of the Multinational:
- For PEs, this strategy gives them privileged access to the business strategies of a multinational group in the fund's sector.
- This guarantee of industry knowledge and proven sector leadership translates into a reduction of investment risk.
- The expected returns are equivalent to or higher than any other PE investment, and the usual PE investment techniques can be used; acquisitions can be leveraged, etc.
- Similarly, investment terms can be standard with 5 years as a target point.
Joint Governance
The fund's Investment Committee is advised by representatives of the multinational, PEs, and other experts, in addition to the Fund Management Team.
The natural exit from the investment, which is fundamental for Private Equity, may be the sale to another fund, Secondary PE, or to one of the Industrial players and incumbents.
In this sense, for the success of the strategic operation, it is essential that, in the Fund's regulatory bases, the Multinational has the capacity to "veto" who the company in which it has invested via the CSF is going to be sold to.
Differences with Corporate-Venture Capital (CVC's)
Corporate-Sponsored Funds (CSFs) have their predecessor in CVCs, Corporate Venture Capital, venture capital funds whose purpose is to invest in early stage disruptive technologies for the sector and to participate in the innovation environment.
CSFs, however, do not pursue disruption "per se", but rather influence and anticipate the environment of suppliers, distributors and customers that favours the multinational's strategy. From the establishment of nearby suppliers of certain critical products to the creation of distribution channels in certain regions, or the creation of alliances with key capabilities for the multinational group.
In a nutshell
CSFs always invest in relation to the Multinational's Strategic Objectives for its ecosystem of customers and suppliers. And they do so without putting the Multinational's Balance Sheet at risk, or taking focus away from the core business. They are Private Equity Funds "affiliated" to the Multinational but without accounting consolidation in the Multinational. For professional Venture Capital (Private Equity Funds and other investors) it is an incentive to be able to access sector leadership strategies that reduce the risk of investments without compromising the expected return. This strategy requires managers "like-minded" to the Multinational to define and coordinate the execution of investments with the different governing bodies.
Among the sectors where this strategy is already being practised are the Insurance, IT-Hardware and Energy sectors. However, given the complexity of finding coordination between multinationals, with all its complexities of internal governance and professional investors, CSF is a strategy still largely to be discovered and exploited, but one that will become increasingly important to support sustainability and compliance with new ESG, digital transformation and productivity requirements.
For more information,
Feu-du-Nord Investments, please direct your enquiries to: [email protected]
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