Guide

Venture capital

What is private equity and venture capital?

Private equity (PE) funding is a general term for investments in private businesses - usually financed from a fund set up by big institutional investment companies.

Venture capital (VC) companies draw on private equity funds to invest in new businesses with high growth potential, eg technology start-ups. In exchange, they take part of the business' ownership, making a profit when they sell their stake and exit the company. VC's typically invest in businesses with:

  • a minimum investment need of around £2 million, though smaller regional VC organisations may invest from £50,000
  • an ambitious but realistic business plan
  • a product or service that offers a unique selling point or other competitive advantage
  • a large earning potential and a high return on investment within a specific timeframe, eg five years
  • sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business' strategy

Business angel investments are another form of PE investment, where wealthy individuals use their own money to invest in small companies with growth prospects - see business angels.

The BVCA provides further guidance on Venture Capital.

Types of PE funds

Many PE funds specialise in a geographical area or industrial sector, while a few serve general investment purposes.

There are four main types of PE funds:

  • Independent funds - the most common form of PE fund. Their capital is supplied by third parties, with no one party holding a majority stake.
  • Captive funds - have one major shareholder, contributing most of the capital. A captive fund can be a subsidiary of a bank or an insurance company, or an industrial company looking to invest in its own sector.
  • Semi-captive funds - have a majority shareholder, but also significant minority shareholders. They can be subsidiaries of financial institutions or run as separate companies.
  • Public sector funds are made up of capital supplied partly or completely by the public sector.

Download the British Private Equity and Venture Capital Association’s (BVCA) guide to private equity (PDF, 1.11MB).

PE funds have either a limited lifespan - usually ten years - or an unlimited lifespan, where the managers can continue to operate as long as they have capital to invest.