Executive summary - Udo Bullmann

Investments are often in individual minority shareholdings with a number of venture capitalfunds investing alongside each other in successive rounds of financing. The investors areclosely involved in determining the investee company’s strategy, hiring key employees,organising the search for further financial resources and negotiating partnerships with largercorporations. Venture capital includes:o Seed: financing provided to fund research, assess and develop an initial conceptbefore a business has reached the start-up phase.o Start-up companies: financing provided to companies for product development andinitial marketing. Companies may be in the process of being set up or been in business for ashort time, but have not sold their product commercially.o Early stage companies: financing to companies that have completed the productdevelopment 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 theirfinancial structures e.g. to develop new products or services, set up a foreign subsidiary,make an acquisition or increase their capacity. Expansion capital includes:o Expansion (as such): financing provided for the growth and expansion of an operatingcompany, which may or may not be breaking even or trading profitably. Capital may be usedto finance increased production capacity, marketing or product development.o Bridge financing: financing made available to a company in the period of transitionfrom being privately owned to being publicly quoted.o Rescue/Turnaround: financing made available to existing businesses, which haveexperienced trading difficulties, with a view to re-establishing prosperity.2.2. Leverage buy-out fundsLeverage buy-out funds are having a much more problematic effect on Europeancompanies and employees. It is the type of fund we are focusing on in this report - a privateequity fund not registered on the stock market or stock exchanges. There is no transparencyor disclosure.The information we have on LBO activities is therefore limited, particularly the effects theyhave on the acquired companies. We have therefore made a set of case studies covering manyEuropean countries. Combining this picture of LBO activities in the past two to five years inEurope with public reports, we can begin to create a picture of the LBO phenomenon. In thevast majority of the cases studied, leverage buy-out funds seem to worsen working conditionsfor the employees and sometimes reduce their numbers. Another impact is on the companyitself. There are too many examples of companies failing to prepare for globalisation afterLBO take-overs, because they lack the capability to invest long-term.Buy-outs are typically majority investments made in companies together with the existingmanagement (a management buy-out or “MBO”) or with a new management team(management buy-in or “MBI”). These normally use sophisticated financial techniques that38