Hidden Equity Strategy?

Last time it was not so easy to know who the owners of private companies were.

Things have since changed. We now live in a transparent era.

However, some people especially high net worth individuals upwards or in some cases, corporates, still want privacy for example while supporting an ongoing negotiation or a strategic investment.

In the case of investing into some businesses some people may want to test things out first before fully committing into them and/or be seen associated with those businesses.

Another common objective in structuring ownership, funding composition of any business or project is that the provider of capital may want practical ways to take back their money, at least the entire original capital injected by them plus some or most of their share of the profits.

In the case of a very dominant capital provider, they may also want these:

-         Control / influence over management

-         Control / influence over the project / business

-         Control over bank account signatories

-         Ability, position to make the ultimate decisions

If things can be made easy and safe for them to invest, make profits and take their money with clear compliance with the laws especially corporate and tax laws, usually they would be OK to share some of the upside with the partners who could facilitate and help create economic value / profits with them.

How to do that?

Let me do a simple illustration.

Basically, the value contributed by a local entrepreneur is to bring interesting deals that generate economic value, preferably some upfront and ongoing guidance, support to jointly generate subsequent value / profits.

 The end outcome designed here is to enable the “big brother” / 大哥 (in Chinese) / お兄さん (in Japanese) to achieve their economic objectives as well as careful strategic positioning in the business / project via majority ownership and hence control over:

-         Board of directors, management

-         Assets / projects

-         Bank account signatories

-         Majority of profits and the portions to be repatriated, portions to be retained

-         Other strategic decisions

They may do so once some pathways have been cleared for them. Prior to that sometimes it makes some strategic sense for them to not be seen at the beginning.

As to the tools used, the typical one is in the form of convertible bonds. They are handy and can allow capital provider to temporarily hide while seeing how things go in Step 1.

Afterwards the capital provider may not convert all. They can convert just enough to get absolute majority they need and leave the rest as loan which can be repaid, repatriated back.

What do you think?

Do feel free to contact me if you have some interesting projects or businesses we can structure and work on.

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