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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 angels.

  • 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 these parameters.

  • 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 for;

  • selected for approach only those private equity sources that meet your requirements.

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