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Private Equity Finance

Seeking private equity will involve giving up ownership of part of your business.

Investors generally show a preference towards businesses with high growth potential. Some investors may also show a preference towards the type of business, for example investing in technology companies. Be prepared for the process of obtaining investment to take time. Investors are unlikely to make quick decisions as they will need time to study your business plans and objectives carefully.

What is Private Equity Finance?

Private equity finance is a way of raising share capital from external investors in return for handing over a share of the business. This may take many forms, including a share of future profits, but is most frequently associated with sharing the ownership of the business to some degree. The two main providers of private equity finance for private businesses are venture capitalists, also known as private equity firms and business angels.

Private equity finance does not offer a guaranteed return to the investor; therefore it is seen as inherently more risky than other forms of finance such as debt or asset finance. To compensate for the risk, investors look for a large future return on their investment. However, it is worth remembering that if the investors’ share of the business has substantially increased in value, you will also benefit from the increased value of your share of the business. Private equity finance is available at many different stages in a business’ development. For example, equity can be used at start up, during expansion, acquisitions and for management buy-outs.

Sources of Private Equity Finance

There are various sources of private equity finance including private investors, corporate investors, professional private equity firms and social development funds. Private equity investors are often referred to as venture capitalists and business angels.

Business Angels

They are private investors who invest in local businesses with high growth potential. Business angels often invest smaller amounts of money than would be available from venture capital funds (usually £10,000 to £100,000). As well as providing the private equity finance, a business angel can also bring business expertise and may want to get involved in the business to help achieving the business objectives.

Venture Capital

Venture capital is also known as private equity finance. These companies usually make large investments into businesses. Typical investments are from £1,000,000 upwards. Due to the large investments, this is not always a suitable option for a new business.

If you are just starting out in business, it may be possible to obtain private equity finance from a business angel in order to get your business started. The business angel may support your business until it is at a level where a venture capitalist may want to invest.

Private equity finance can sometimes be more appropriate than other sources of finance, e.g. bank loans, but it can place different demands on you and your business.

Advantages of Private Equity Finance

The main advantages of private equity finance are:

  1. The funding is committed to your business and your intended projects. Investors only realise their investment if the business is doing well, e.g. through stock market flotation or a sale to new investors.
  2. The right business angels and venture capitalists can bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision making.
  3. Investors are often prepared to provide follow-up funding as the business grows.

Some important disadvantages of private equity finance are:

  1. Raising private equity finance is demanding, costly and time consuming. Your business may suffer as you devote time to the deal. Potential investors will seek background information on you and your business, they will closely scrutinise past results and forecasts and will probe the management team.
  2. Depending on the investor, you will lose a certain amount of your power to make management decisions.
  3. You will have to invest management time to provide regular information for the investor to monitor.
  4. At first you will have a smaller share in the business, both as a percentage and in absolute monetary terms. However, your reduced share may become worth a lot more in absolute monetary terms if the investment leads to your business becoming more successful.
  5. There can be legal and regulatory issues to comply with when raising private equity finance, e.g. when promoting investments.
Private Equity Finance - Things to Consider

Once you have decided to seek private equity finance, you'll need a comprehensive business plan incorporating a detailed marketing plan and realistic financial projections.

You may find it helpful to hold initial discussions with your business adviser and to research potential investors.

You need to consider the following issues:

  1. How much funding you need and what exactly the funding is for?
  2. How much control you hope to retain and the skills the business needs?
  3. How long you need the funds for?

Any potential investor will look for a number of core issues in your business plan:

  1. What are your funding needs?
  2. Are your plans for the business realistic?
  3. Is your venture appropriate for external investment?

Your business plan should seek to address these issues and you should tailor the information you provide according to the investor you’re approaching.

Approach short-listed investors directly through an introduction or contact or their association or network.

If private equity finance does not suit your business, you can consider the following alternatives:

  1. Loans - There are many options available, from commercial mortgages secured against your business assets to short-term borrowing for periods of between three and five years.
  2. Overdrafts - These can be expensive but are a flexible form of borrowing. They’re not especially suitable for long-term private equity finance as they are repayable on demand.
  3. Loans from family and friends – This is a great way of raising private equity finance.
  4. Government support - Your local Business Link is a good starting point for information on the range of support available.
  5. Joint ventures - The term normally applies to the co-operation of two or more individuals or businesses in a specific enterprise rather than in a continuing relationship.
  6. Credit cards - These are a quick way of raising private equity finance and a flexible form of borrowing. However, unless you can manage your cards very carefully to avoid paying interest and other fees, they are not suitable for long-term private equity finance.

Networking is an important way of finding investors and it may be a good idea to find suitable candidates through recommendations from your specific industry or their associated network.