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.
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.
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