Accountants – their role in private equity

Mr. January is co-founder and director of Medu Capital. He is
responsible for its strategic development, investment execution and
management. A qualified chartered accountant, Mr January is a graduate
of the University of the Witwatersrand, where he completed degrees in
commerce and accounting.

After qualifying with Deloitte &
Touche, Mr. January had a stint as audit manager at Deloitte’s before
joining Anglo American as a research analyst in their investment and
treasury department. He was promoted to Portfolio Manager and later
Divisional Investment Manager, responsible for Anglo American’s pension
fund portfolio. Mr. January joined RMB Asset Management in the
marketing department, where he was responsible for strategic marketing
to the public sector. He later became a member of the investment team
responsible for managing public sector portfolios. He was then
appointed as an executive director of RMB Asset Management. He is
currently non-executive Director and Chairman of the audit committee at
RMB Asset Management. Mr January also serves on various boards as a
non-executive director.

To operate and manage a
successful business requires a number of complimentary skills. The
skill-set required includes technical, financial, sales & marketing
and human resources. Sound businesses, with track records of success,
have generally implemented effective financial systems and have good
financial analytical skills.

Financial skills is a broad concept that covers a wide area ranging
from financial and auditing to managerial and cost accounting. A
chartered accountant is a professional who is equipped with most of
these financial skills. There are just over 20 000 accountants in the
country, so there are significant opportunities for people looking to
pursue a career in the accounting profession.

Traditionally,
accountants were seen as bean counters primarily responsible for the
function of financial, auditing and managerial accounting. This
generally involved the preparation of the annual financial statements,
the preparation of the monthly board packs, overseeing the accounts
department, auditing financial statements and calculating the accurate
cost price of finished goods.

Over the last 15 years the role
of the accountant has changed significantly. A recently qualified
accountant is seen as a “general practitioner” and needs to specialise
in a particular field. The most common areas of specialisation are:
• Staying in the accountant profession as an auditor or professional advisor
• Joining commerce and becoming a financial director or chief financial officer of a company or
• Joining the financial services industry

The
financial services industry is huge area and covers life companies,
banks, corporate finance, structured finance, asset management, private
equity, securities, etc. The most common financial skills required
within financial services are financial statement analysis and
valuation of businesses.

Financial statement analysis is
essentially a ratio analysis done on a company’s annual financial
statements. This is typically done between two companies in order to
establish which company is a better investment. The following example
might illustrate the point.

Which company would you invest in? Company A or Company B

Valuing
a business involves placing a fair market value on the assets and
liabilities of the business. It gives the answer to the basic question
“How much am I prepared to pay for company A and company B in the
example above?”

Private equity involves sourcing capital from
investors and deploying this capital in businesses. The capital is
typically deployed in private companies, as private equity is an
alternative asset class that needs to differentiate itself from listed
equities. The private equity investor’s investment horizon ranges from
3 to 7 years and on exit of the business, return the capital to the
investors. The investment could take one of the following forms:
• Expansion capital:
If
a private business would like to expand its business and can only raise
equity capital (rather than debt capital) it would approach a private
equity company that will take an equity stake in the business in return
for the capital invested.
• Replacement capital:
If an
entrepreneur that started a business a long time ago and wishes to
retire and sell the business, the management team could approach the
private equity company to buy the business. The private equity company
would own the business in conjunction with management.
• Management buy out:
If
a division of a large conglomerate becomes non core the management team
could approach the private equity company to buy the business from the
conglomerate.

The private equity investor typically sits on the
board of the business in which it made an investment. They will get
involved in the strategic direction of the business, support the CEO
and marketing director in securing new business and support the
financial director with the corporate governance structures of the
business.

As illustrated above, private equity is a challenging but exciting opportunity for people.

Answer to the question:

It would be company A, as it has a better net profit margin and ROE as shown below: