Private Equity and Venture Capital investment

By Bishop Fleming

Whether you’re a start-up business or an established enterprise looking to take your business to the next level, it is highly likely that you will need funding to fulfil your business’ goals.

There is a wide range of funding types available and determining what is the most appropriate type and source can be difficult.

In this blog post we will be exploring Private Equity and Venture Capital funding.

Equity Funding

In its simplest form, equity funding is the process of raising cash through the sale of shares in a company.  Equity funding is often used where a business’ growth plan has a cash need but no security to offer to the funder. Instead of offering an asset as a guarantee, the investor will own part of the business.

Equity funding differs fundamentally from debt because there is no need to repay the cash. The funder has invested in the business for the mid- to long-term and will recoup their investment when they sell their shares in the business.

This is particularly useful for a business looking to grow. Instead of trying to generate cash to make monthly loan repayments, a business can focus on delivering reliable and sustainable growth.

Equity funding can come from a variety of sources, including individual investors, angel investor networks, private equity and venture capital firms and also where the companies list on the various share trading platforms.

Private Equity

Private Equity (“PE”) firms manage a pool of funds raised from institutional investors (such as pension schemes) or High Net Worth individuals.

The PE firms are tasked with investing these funds in businesses and growing the invested businesses so they can sell their stake in the future at a profit.

PE is therefore much more than just an ‘investor’, as they will work closely with the management team to evaluate the business’ strategy and help grow the business.

PE firms are of course looking to drive shareholder value and at some point will want to exit. It is important to recognise the ultimate goals of PE.

However, there are a number of important benefits to partnering with a well-aligned PE firm:

  • highly experienced business managers with a track record of delivering growth.
  • well-connected in the business community, offering valuable sector-specific insight to open up new avenues of growth.
  • quick access to follow-on funding.
  • committed to success – by owning a stake in the business, PE firms have a vested interest in making sure a business does well.

Finding the right PE firm is an extremely important part of the fundraising process.

Choose one based on their experience in your sector and take the time to get to know the team before committing. You will be working with them for a number of years, and they will have a say in how your business is run.

PE firms will typically look to hold an investment for 3-5 years, although this can vary substantially.

Venture Capital Trusts (“VCTs”)

Venture Capital takes the principle of Private Equity even further.

VCTs themselves are quoted companies required to hold at least 70% of their investments in shares or securities that they have subscribed for in qualifying un-quoted companies.

The benefit of a VCT is it is highly tax-advantaged from the investor’s point of view – much like the Enterprise Investment Scheme (“EIS”) which offers substantial tax breaks to investors investing money in higher-risk businesses.

From a practical perspective, these tax benefits enable VCTs to offer more attractive valuations and also make earlier stage and higher-risk investments.

There are limits and criteria which VCTs must abide by for investments to be eligible for tax relief. Therefore, investments made by VCT funds are typically smaller than those made by larger, non-VCT PE firms.

Summary

Equity funding – and PE and VCT in particular – can be a highly attractive form of finance for businesses looking to scale-up and reach their next level.

A partnership with the right firm will offer more than the just cash, it can provide a platform of experience and sector-specific networks which can substantially accelerate growth.

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