From £5m to hundreds of millions of pounds
Until exit (typically 5 years)
A controlling stake in your business (or complete control in the case of a buyout or buy-in)
Up to 1 year typically
Expansion, recapitalisation, buyout or buy-in
Private equity is a type of equity financing suitable for established private businesses. Private Equity funds give your business money in return for a large or controlling share in your business.
Both private equity (PE) and venture capital (VC) firms invest in businesses and grow them (usually for up to 5 years) in order to make ‘above-market’ returns when businesses are sold or listed (IPO).
The money managed by most VC and PE funds comes from institutional investors, e.g. large pension funds, insurance companies and sovereign wealth funds. These same institutions invest in public markets, bonds, property and infrastructure. From the institutions’ point of view, investing in VC and PE funds is a key part of their overall investment portfolio.
Those are the similarities. But there are major differences in the way that VC and PE firms do business.
Put simply, PE and VC firms buy different types and sizes of businesses, invest different amounts of money, and claim different percentages of equity in their investee businesses.
VC firms tend to invest up upwards of £250,000 in high-growth start-ups and early-stage businesses that need capital and business expertise to take them to the next level, whereas PE firms prefer to invest much larger amounts (£5m to hundreds of millions of pounds) in established businesses that require a cash injection or a new strategy to move them forwards.
The stake a VC fund takes will depend on how it values your business but will always be a minority stake. A PE firm, on the other hand, will take a larger or majority stake in a business – or take complete control in the case of a buyout or buy-in.
In summary, a PE firm might aim to:
• buy out the founder of your business
• cash out your existing investors
• provide capital for expansion
• provide recapitalisation (if your business is struggling)
• buy your business outright
• arrange a leveraged buyout – in other words borrow extra money to boost its buying power, using the assets of the acquisition target (i.e. your business assets) as collateral.
• Business angels – Business angels are private individuals who are prepared to put their own money into start-up or early-stage businesses in exchange for a share of the company’s equity (i.e. equity finance). Angels may invest on their own or as part of an angel network. Typically, they are experienced entrepreneurs and, in addition to money, they bring their own skills, expertise and contacts to the table.
• Venture capital – Venture capital is financing given to start-ups and early-stage businesses. Venture capital funds look to invest larger sums of money than business angels – typically more than £250,000 – in return for an equity stake. Venture capital is most suited to high-growth businesses with long-term growth potential, i.e. those destined for sale or public listing (IPO).
• Equity crowdfunding – Equity crowdfunding is a type of equity finance whereby people (‘the crowd’) invest in an early-stage unlisted company, in exchange for shares (equity) in that company. Individual investors thus become shareholders and stand to profit if the business does well – they might also lose some or all of their investment. Equity crowdfunding usually takes place over an online platform.
• The government’s Enterprise Investment Scheme (EIS and SEIS) and VCTs.
• Initial public offering (IPO).
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