25 Mar 2002  Lessons from the Classroom

Case Study: A Lesson in Private Venture Financing

Using a case discussion on Gray Security Services, Harvard Business School associate professor Walter Kuemmerle highlights issues confronting entrepreneurs and investors interested in Africa.

 

With few opportunities for IPOs, a developing infrastructure, low transparency, and a limited labor market, the environment for private venture financing in Africa could be described as "challenging" at best.

Yet if the demands of an African market raise specific concerns when it comes to financing private ventures, it can also offer unique rewards.

Harvard Business School associate professor Walter Kuemmerle highlighted some of the issues confronting entrepreneurs and investors in a case discussion on Gray Security Services, an entrepreneurial venture that provides complete security services to companies in South Africa, other African countries, and parts of Europe. In the case, Gray has recently undergone a financial restructuring with the help of private equity firm Brait Capital Partners. Now its owners must decide what strategies to pursue in order to achieve continued growth.

Being listed on the stock exchange does mark a company's value but in this case it was a low mark.
— Walter Kuemmerle

Kuemmerle fired questions at conference participants on Gray's available options. Should they go public? Doing so might allow them to pay back Brait and raise additional capital. Would it be a better idea to ride the wave of globalization and try to get acquired by a multinational corporation? Or should the firm remain privately owned and focus its growth in Africa? After all, he noted, markets beyond Gray's current reach might be saturated already.

In the end, Gray's owners opted for an IPO in March 2000. Valued at 400 million Rand on the Johannesburg Stock Exchange, its shareholders included about 1,000 of the company's security guards.

From IPO to acquisition

"An IPO abroad wasn't possible," Kuemmerle noted. "It wasn't large enough to be listed on an international exchange." After a few months, the stock became a "small-cap orphan" in South Africa's two-tier market, trading at 1.39 Rand/share in July 2000 as emerging markets continued to fall out of favor with investors. Later that year, Securicor acquired the company for £45 million.

"Going public was a great way to get acquired," Kuemmerle said, while noting that an argument could also be made for staying private. "Being listed on the stock exchange does mark a company's value, but in this case it was a low mark."

Grey's experiences have relevance for anyone interested in financing or starting a new venture in Africa, Kuemmerle concluded, and the very nature of their business is instructive as well.

"There are some businesses out there that aren't obvious but are very attractive," he advised. "Don't just look at high-tech stuff."

Julia Hanna is the Associate Editor of the HBS Bulletin.