Hedge funds and Private Equity - PES

Let’s look at different types of Private Equity:
Venture capital is focused on young, entrepreneurial companies and is an essential part of
value creation in the whole private equity financing cycle. It provides finance for start-ups- at
their inception or shortly after their first technical or commercial developments. Much of this
segment is technology-related e.g. new information and communication technologies, life
sciences and healthcare, electronics and new materials industries. Investments are often in
individual minority shareholdings with a number of venture capital funds investing alongside
each other in successive rounds of financing. The investors are closely involved in determining
the investee company’s strategy, hiring key employees, organising the search for further financial
resources and negotiating partnerships with larger corporations. Venture capital includes:
Seed: financing provided to fund research, assess and develop an initial concept before
a business has reached the start-up phase.
Start-up companies: financing provided to companies for product development and initial
marketing. Companies may be in the process of being set up or been in business for a
short time, but have not sold their product commercially.
Early stage companies: financing to companies that have completed the product development
stage and require further funds to initiate commercial manufacturing and sales.
They will not yet be generating a profit.
In later stage expansion capital finance is provided to purchase holdings in existing, generally
profitable companies by subscribing new capital (as equity or quasi-equity). Investee companies
here have growth profiles that necessitate the consolidation of their financial structures
e.g. to develop new products or services, set up a foreign subsidiary, make an acquisition or
increase their capacity. Expansion capital includes:
Expansion (as such): financing provided for the growth and expansion of an operating
company, which may or may not be breaking even or trading profitably. Capital may be
used to finance increased production capacity, marketing or product development.
Bridge financing: financing made available to a company in the period of transition from
being privately owned to being publicly quoted.
Rescue/Turnaround: financing made available to existing businesses, which have experienced
trading difficulties, with a view to re-establishing prosperity.
2.2. Leverage buy-out funds
Leverage buy-out funds are having a much more problematic effect on European companies
and employees. It is the type of fund we are focusing on in this report – a private equity fund not
registered on the stock market or stock exchanges. There is no transparency or disclosure.
The information we have on LBO activities is therefore limited, particularly the effects they have
on the acquired companies. We have therefore made a set of case studies covering many European
countries. Combining this picture of LBO activities in the past two to five years in Europe
with public reports, we can begin to create a picture of the LBO phenomenon. In the vast
majority of the cases studied, leverage buy-out funds seem to worsen working conditions for
the employees and sometimes reduce their numbers. Another impact is on the company itself.
There are too many examples of companies failing to prepare for globalisation after LBO takeovers,
because they lack the capability to invest long-term.
Part I – Hedge funds and private equity funds – how they work
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