Business finance : theory and practice

Summary
the shares to be totally held by the fund and ‘delisted’. This means that the shares are
no longer available to the public through the stock market.
When the private equity fund has ‘turned round’ the underperforming business,
the business is disposed of, in some cases by relaunching it as a listed business.
Debenhams plc, a high street department store, was a listed business that was bought
by a consortium of three private equity funds (CVC Capital Partners, TPG Capital and
Merrill Lynch Private Equity) in 2003. Less than three years later the business was
relisted, making the consortium more than three times the £606 million that it had
invested in the 2003 purchase (Rigby 2007). A number of ‘household-name’ businesses
(including the Automobile Association (AA) and Boots the Chemist) are currently
owned by private equity funds. Private equity funds are estimated to own businesses
that employ around 19 per cent of all UK private sector workers (Power 2006).
Summary
Business finance
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Investment decisions.
Financing decisions.
Usually involving significant amounts.
Risk always a major factor.
Not the same as accounting.
Organisation of businesses
l Most UK businesses are limited companies.
l Artificial person, with separate legal personality.
l Enables investors to limit their losses on equity investments.
l Shares in the ownership of companies can be transferred.
l Cheap and easy to form a limited company.
l Managed by directors on behalf of shareholders.
l Duty of directors to account for their management of the shareholders’ assets.
l Corporate governance has become a major issue; scandals have led to the
emergence of the Combined Code.
l Limited companies can only come to an end through a formal liquidation
(winding up).
Long-term financing
l Businesses are financed by:
l ordinary shares;
l preference shares; and
l borrowings.
Derivatives
l Assets or obligations whose existence and value depends on some asset from
which they ‘derive’.
l Usually concerned with risk management.
l Financial derivatives widely used in business.
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