Private equity firms are like venture capital funds in that they raise their capital from institutional investors, such as pension funds or insurance companies. The key difference is that a private equity firm will usually purchase a majority stake in the company rather than a minority stake. This means that private equity deals are usually for the purpose of the founder and other investors to exit the business. As a result, the types of businesses targeted by private equity are usually well established, highly profitable and have a track record of growth. Often this will exclude businesses with turnover of less than £10m, up to £100m, however there can be exceptions to this.
Private equity firms often buy-out companies using debt. This means they look for businesses that generate profit. They will want to see that the business can afford to carry debt including elements like capital equipment as this might also be able to support borrowing (asset finance).
They then offer support much like venture capital funds in order to help the business grow so that it looks more appealing for larger investors / owners.
Typical Investment Size: £10m–£100m
Stake: Typically more than 50%
Involvement Timeframe: 3-5 years
The investment from private equity is often very substantial and can help facilitate plans for growth.
Private equity investors want to see the company do well in order to see a return on their investment. Therefore, they will use their expertise to help support the company’s growth strategy.
Private equity helps facilitate an exit strategy as they will often buy your controlling stake in the business which immediately gears the company towards an exit for themselves in 3 to 5 years.
Listed companies are highly regulated and will have to be much more transparent in its operations and financial reporting.
Private equity often values a business solely from a financial point of view. As a business owner you may want the business to exhibit other drivers of value, such as its social impact.
It can be difficult to obtain private equity funding because private equity investors tend to come to you. You will have to ensure your business offers high growth opportunities and is able to quickly pivot towards gaining the funding when the opportunity arises.
This document is intended to be an aide-mémoire to help you consider different forms of finance and which ones might be appropriate for your business; it is not a comprehensive guide to all forms of finance. There could be different tax and legal implications associated with different forms of finance. Professional tax and legal advice should be sought to prepare for these different forms of finance.