and Business Resources
Private equity for entrepreneurs and management teams
What is private equity?
The term "private equity" is the term generally used in Europe to
cover the industry as a whole, both buy-outs and venture capital.
"Venture capital" is a subcategory covering the seed to expansion
stages of investment. Private equity describes equity investments
in unquoted companies often accompanied by the provision of loans
and other capital bearing an equity risk.
Private equity provides long-term, committed, risk sharing equity
capital, to help unquoted companies grow and compete.
It seeks to increase a company's value
to its owners, without taking day-to-day management control.
Although lenders (eg. banks) have a legal right to interest on a
loan and its repayment, irrespective of the borrower's success or
failure, the private equity investor's returns are dependent on the
growth and profitability of the business.
Owners will need to sell some shares in their companies (generally
a minority stake) to the private equity backer, who may seek a non-executive
board position and attend monthly Board meetings.
Private equity investors not only provide equity capital, but experience,
contacts and advice when required, which sets private equity apart
from other sources of business capital.
Questions to ask yourself
Before considering raising private equity you need to answer these questions:
- Do you have high growth ambitions for your company?
- Are you willing sell some of your company's shares to a private equity
investor with a view to increasing your stake's value to more than that
of your original holding within a few years?
Private equity firms only target companies with real growth prospects,
driven by a skilled, ambitious management. So if you and your company
fit this description and you answered 'yes' to the questions above, private
equity certainly is worth considering.
Private equity sources
Investors have a wide range of investment preferences which include the
amount of capital you require, your company's investment stage, industry
sector and location, and these will affect the sources you target. Investment
stages include: seed, start-up, early stage, expansion, management buy-in
(MBI), management buy-out (MBO) and rescue/turnaround situations.
As a basic guideline there are two main sources of private equity with
broadly different investment preferences - private equity firms and business
Most private equity firms target firms requiring investment of over
£100,000, mainly in expansion stage companies and MBOs/MBIs. The overall
average deal size in 2000 was £5.4 million, although 60% of companies
backed in 2000 received sums of private equity of less than £1 million.
There are some specialist and regional firms which invest outside
Business angels tend to invest between £10,000 and £100,000 in start-up
and other early stage financings.
How to target a source of private equity effectively
Raising any type of capital needs research and strategic targeting. Before
approaching any source of private equity you will need to have:
a good business plan with an executive summary;
assessed that private equity is suitable for your business;
know how much private equity you require and what it will be used
selected for approach only those private equity sources that meet
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