Question

14 of 16 CVC programs claimed that their primary goad was strategic, but half used financial measures such as cash-on-cash returns or IRR to gauge the success of an investment. Is the generation of “cash” a strategic goal for most strategic investors? Please answer in 2-3 paragraphs

Answer 1

Solution:-

We can go back as far as we want to but the objective of investing has always remained the same- Protecting capital and maximising returns for investors. The 21st century world of investing which has seen gigantic private equity firms climb up is no different. Having said that, as the business world has become more competitive, investors have found more sophisticated ways to extract returns from their investments. We live in an era of private equity investing where billions of dollars are invested in companies without the need of public markets. These private equity investors are sophisticated firms with great strategic partnerships in the industry. They seek to not just invest capital as passive investors but to leverage their strategic strengths and invest in businesses that offer great strategic value.

The reason why strategic investing has become so successful is because it offers a great way for investors to leverage their circle of competence and thus reduce risk in their investments. However, this doesn't change the fact that the ultimate goal of these investments is to make money and maximise financial returns. In simplest words, strategic approach is the modern tool to maximise financial returns from investments. This is why see the large investment groups with industry experts, great partnerships and ways to extract synergies out of their transactions. Strategic investing is considered a better way to invest- A way that gives a higher chance of investing success, maximising the returns and minimising risks.

This is why these investors still use IRR and other metrics such as cash-on-cash to measure the success of investments. The objective is to make strategic investments and thus leveraging strategic strengths to generate cash returns from those investments. At the end of the day, strategic approach is the means to the end which is generating cash returns. BE it in the form of dividends, capital appreciation or other means, these investors are always looking for cash returns. Thus, generation of cash is the primary goal for strategic investors, as it is the goal for any other investors.