Let us assume you are an owner of a classy and popular downtown restaurant. You know that somewhere in the suburb there is a promising new photo studio. A lot of talented young photographers work there. But they are currently using only 25% of their maximum service capacity. Why? Because their customer base is still too small. You invest money into the photo studio and become its co-owner. Then you start referring your high-society customers, who dine and hold events at your restaurant, to the studio. The news spread. The studio’s transaction volume grows. They become a more lucrative and expensive business (in comparison to the amount of your original investment). Now you can resell your share in the studio at a better price. And, of course, you can invest in other startups and benefit from the process even more.
In this example you are acting like a typical venture capital business. Private equity and venture capital companies specialize on investing money into emerging businesses and rapidly growing startups. In exchange they get their share of ownership or equity in these startup businesses.
The major purpose of private equity companies is to improve the efficiency of businesses from their portfolios and partake of their growing revenues. You can achieve such efficiency boost through:
- Cross sharing or mutual referral of individual businesses’ customer bases (including, potentially, your customer base, as in the example above)
- Optimizing inner production, accounting, and processing
Businesses from portfolios of private equity companies often do accept electronic payments (including credit cards) and process transactions. They might already have some existing contracts with processors/acquirers before the private equity company “comes in”. But they often fail to realize that their existing processing terms are very unprofitable. Moreover, even if they want to improve processing terms, they do not know how to approach the new acquirer. And, to be honest, they cannot expect much from negotiating better terms. Why? Well, primarily, because their processing volumes are still low.
A private equity company allows startups to solve this problem of processing terms improvement.
Say, you are a venture capital/private equity company. How can you organize payment processing for your portfolio members? (Especially, if you look around and see that the industry is still largely dominated by legacy platforms.) The best option is to put a robust payment gateway solution between startup businesses from your portfolio and these legacy processing platforms. Provider of this payment gateway solution will truly simplify the situation for you. It will “do all the dirty work” associated with integration with this or that acquiring bank.
In order to get the efficiency boost, a venture capital company, usually, tries to consolidate payment processing within its portfolio. Implementation of a solid payment gateway solution allows it to handle the technical aspect of the problem. This consolidation makes things easier for the private equity company and its portfolio members. The 3 major reasons are as follows:
- Reporting and processing become much more transparent.
- You can optimize other internal processes. For example, you can replace a bunch of accounting departments of your sub-merchants with one unified accounting department.
- Transition to the new universal acquirer/processor is easier when the volume is consolidated. This new acquirer is often willing to offer better processing terms than current acquirers of individual businesses from the private equity company’s portfolio.
For more information on how UniPay Gateway can assist companies with portfolio, feel free to contact us.