1. Building the platform for growth
A first and critical step in any corporate growth programme, and particularly when managed through a Captive Growth Fund, is to define the objectives, criteria and operating structures of the process upfront with clear buy-in and support from senior leadership and board members. This process will provide the investment mandate and governance process that the Fund Manager will use to drive opportunity development and decision making throughout the investment process.
2. Maximising return on effort
The Captive Growth Fund uses a tried and tested approach that combines investment banking, strategy consulting and corporate finance techniques to identify and systematically develop investment opportunities. An in-depth internal analysis of the organisation’s current capabilities and assets, and an external market intelligence function unearths relevant target growth opportunities. A Fund Manager should bring both the process experience and skills, together with expertise and networks that span multiple markets and industries in order to maximise the value from this process.
To maximise return on effort in the investment process, only the most attractive opportunities should be developed through to a stage where the investment case can be presented for the ultimate investment decision. This systematic development and filtering of opportunities creates an internal atmosphere of competition for the scare time and resources available to the Fund Manager, and ensures that only the most attractive investments reach the investment committee.
3. Actively managing value creation
Following a decision to invest, the Captive Growth Fund employs an active management strategy for driving value creation both in the target investment, and in the integration of this into existing operations. The focus here is on growth through cash flows generated by operations rather than the more passive PE investment approach that relies on purchasing under-valued assets and balance sheet restructuring to deliver value.
4. Fund Structure
The structure of a Captive Growth Fund is extremely simple. The investor company retains complete ownership of the fund and veto rights on investments through the Investment Committee, and benefits from the returns generated through the fund. The Fund Manager will drive the investment process and will usually generate fees based on the funds under management, and be incentivised through a performance carry in the fund return.
5. The Captive Growth Fund overcomes several of the downfalls of other growth models
- Introduces a stand-alone growth engine with dedicated funding that combines the operating capabilities and strategy of the company with external professional management, allowing the company to drive relevant revenue growth while maintaining a focus on existing businessoperations;
- Provides a company with rapid access to proven investment capabilities without the time and cost of developing this capability internally, allowing for rapid deployment of tailored growth programmes;
- Provides a partnership with a team of specialised and experienced growth investment professionals with extensive opportunity sourcing networks, a capability that would be extremely difficult to develop internally;
- Eases the purchasing decision to acquire these investment skills as fund manager fees typically come as a percentage of funds under management and thereby soften investment returns rather than creating an additional cost burden;
- Utilises existing and proven investment and governance structures to execute on the growth strategy;
- Ensures, through the opportunity filtering process, that the best opportunities are presented for investment. This is in stark contrast to many corporate investments in opportunities that “land” on CEOs desks and trigger reactive or opportunistic investments.
- Allows for periods of high-growth investment followed by operational integration and embedding. This natural growth cycle is a requirement to sustainable growth and is often prevented by costly internal functions that cannot lie under-utilised.
The Captive Growth Fund is one of many options available to progressive managers in order to put their lazy balance sheets to work. Inaction should not be the strategy of choice during these turbulent times.