High growth companies in emerging countries need capital funding. Capital funding is used by a business as operating capital. A business’s capital funding includes both equity (stock) and debt (bonds and other loans). Equity owners, bondholders, and other lenders are part of the capital funding equation. Both equity owners and debt holders want to earn an attractive rate of return on their capital as either dividends and capital appreciation from stock or interest from bonds and other debt instruments.
Capital funding entities like venture capital firms provide capital to growing emerging markets companies. A capital funding business may focus on funding a certain industry or business categories, such as technology or health care, or specialize on a specific type of company, such as software developers, within an emerging markets country. It may also focus in a certain funding term, such as short-term financing, or it may provide multiple financing options to companies in which the firm invests. The capital funding entity may prefer to fund a certain business stage, such as during its facility construction, or at any stage of development.
What Is Capital Funding Work for Emerging Markets Countries?
Capital funding works to provide necessary operating capital for rapidly growing businesses in emerging markets countries. In some cases, the local country government is willing to incentivize the business but, in others, the company must solicit capital funding at a time when it’s not yet generating positive cash flows.
Young businesses may have intensive capital needs before reaching the growth stage. Reliable investors with an appetite for risk may be in short supply. The venture capital firm or private equity investor looks for the best of the best of new businesses. Many young companies don’t know how to approach venture capital firms and, frequently, a proposed investment structure offered by the venture capitalist or private equity business is inadequate for the growing business’s needs.
Structuring Venture Capitals for Specific Purposes
A growing number of venture capital firms and private equity funds pool capital to provide capital funding in emerging markets countries. For instance, if investors want to commit private equity capital to small or medium-size companies with strong long-term growth potential in China, the entity may structure a venture capital fund to enable its investors’ goals:
- A venture capital fund provides growing emerging markets firms with capital. The venture capital fund invests capital with negative cash flow expectations for several years.
- Most reserve the investors’ rights to replace current management. The venture capital fund allows investors in the pool to take an equity stake in small and/or medium-sized enterprises. In some cases, a representative of the capital funding entity takes a seat on the board of directors. Most don’t seek a management role.
- Ultimately, fund managers and investors seek a high capital As the emerging markets business generates positive cash flows, the investors may want to cash out their investment. Since a venture capital fund or pool is typically illiquid, a “liquidity event,” such as an initial public offering, is necessary.
The venture capital or private equity firm may make a generous return on investment when the company goes public. Not every investment rewards the venture capitalist or private equity investor. Some emerging markets countries, such as India, expect to see in the near-term.
Let’s discuss the top seven capital funding strategies that promote investment in the next section.
Top 7 Capital Funding Strategies that Promote Investment in Emerging Countries
1. Invest in a venture capital or private equity fund if you’d like more exposure to long-term growth rates in emerging markets countries
Do your homework first. You’ll need to commit sufficient capital to the fund and most funds aren’t liquid. If there’s any chance you might need capital in the near future, don’t invest in a private capital fund, or venture capital pool.
2. Consider your market and sector preferences
For instance, capital fundraisers report that more investors are willing to commit long-term capital to China. About 77 percent of private capital fundraising was earmarked for the Asian markets. If your interest is in buyouts, growth, turnaround, balanced, co-investment (co-investment multi-manager), direct secondaries, or private equity secondaries, look for a fund that matches your outlook and interests.
3. Open your mind to the possibilities of capital funding in emerging countries
Venture capital and private equity raised more money in Latin America (South and Central America and the Caribbean countries) and the Middle East in 2015-2016 than ever before.
4. Diversify to spread capital funding risks
A private equity fund of funds investment provides you with investment exposure in multiple funds. Although your ultimate return-on-investment may be higher in a specialized fund, you must select the right one. Simply speaking, a fund of funds is akin to a capital funding mutual fund.
5. Avoid overweighting investment capital in any one emerging market
Private capital funding for emerging markets countries continues to grow. Between 2005 and 2015, emerging markets capital funds raised more than $320 billion in Greater China, South Asia, and sub-Saharan African markets. More than half of investor capital went to Emerging Asia opportunities. Middle East, LatAm, and African opportunities received more than 30 percent of these funds.
6. Follow the money
Review recently closed capital funds. Look for venture capital, growth, and late stage or expansion funds as examples of capital funding vehicles.
7. Ask questions before you invest. Inquire about the types of emerging markets investors in search of private equity funds over the next year
Don’t assume that traditional Western venture capital or private equity names know the emerging markets. You’ll see corporates, foundations, financial institutions, government agencies, and others spearheading capital fundraising deals.
The reasons to invest in emerging countries makes great financial sense, but it’s not for everyone. If you’ve amassed sufficient risk capital and want to gain greater exposure to companies growing at faster rates than the West, investing in the growth of tomorrow’s emerging market superstars can add to your wealth.
Some of the world’s greatest investors consider the common good as well. Support of growing enterprises in the emerging world may offer great personal satisfaction and higher than market returns.