A Guide to Private Equity - BVCA admin

An introduction to private equity
Definition
Private equity is medium to long-term finance provided in return for an equity stake in potentially high
growth unquoted companies. Some commentators use the term “private equity” to refer only to the
buy-out and buy-in investment sector. Some others, in Europe but not the USA, use the term “venture
capital” to cover all stages, i.e. synonymous with “private equity”. In the USA “venture capital” refers
only to investments in early stage and expanding companies. To avoid confusion, the term “private
equity” is used throughout this Guide to describe the industry as a whole, encompassing both “venture
capital” (the seed to expansion stages of investment) and management buy-outs and buy-ins.
How this Guide can help you
This Guide aims to encourage you to approach a source of private equity early in your search for finance.
It explains how the private equity process works and what you need to do to improve your chances of
raising it. It gives guidance on what should be included in your business plan, which is a vital tool in your
search for funding. It also demonstrates the positive advantages that private equity will bring to your
business.
The main sources of private equity in the UK are the private equity firms (who may invest at all
stages – venture capital and buy-outs) and “business angels” (private individuals who provide
smaller amounts of finance at an earlier stage than many private equity firms are able to invest).
In this Guide we principally focus on private equity firms. The attributes that both private equity
firms and business angels look for in potential investee companies are often very similar and so
this Guide should help entrepreneurs and their advisers looking for private equity from both these
sources. “Corporate venturers” which are industrial or service companies that provide funds and/
or a partnering relationship to fledgling companies and may operate in the same industry sector as
your business can also provide equity capital.
Throughout the 1990s the technology hype, internet boom and massive capital investment propelled the
New Economy revolution, but internet mania in the late 1990s caused technology stocks to skyrocket
until the bubble burst in the year 2000. There was over-optimism, too much easy money, proven ways
of doing business were replaced by irrational exuberance and private and public company market
valuations were driven to unsustainable levels. The mid 2000’s saw a substantial increase in the later
stages of private equity transactions with large and mega buyouts fuelled by significant amounts of
debt. With the onset of the credit crunch in 2007/8 and the reduction in the general availability of bank
loans, and tightening of the conditions required to obtain loan finance, there is considerably less debt
available for deals in the current economic environment. Banks are reluctant to lend, particularly if they
have not had the experience of going through a downturn in the leveraged, high risk market before.
There is however currently no shortage of private equity funds for investment in the UK. Private equity
deals going forward are likely to involve much less leverage, and therefore perceived lower risk for
the banks. Excellent opportunities remain open to companies seeking private equity with convincing
business proposals.
Private equity firms are looking for investment opportunities where the business has proven potential
for realistic growth in an expanding market, backed up by a well researched and documented business
plan and an experienced management team – ideally including individuals who have started and run
a successful business before. This Guide will help you to understand what private equity firms are
looking for in a potential business investment and how to approach them.
6 A Guide to Private Equity