Image by Markus Winkler from Pixabay
If you read the media, you may have a poor opinion of both Private Equity and Venture Capital, but it can be claimed that both these investors/business funders have a valuable contribution for the growth of businesses and the economy in general.
There are many articles in the press and online that give an extremely negative view of PE and VC, even giving pejorative nicknames like “vulture capital.” Critics claim private equity firms are bloodsuckers that pile healthy companies with debt then strip out their asset, leaving a lifeless shell.
Needless to say, some PE and VC deserve this bad reputation, but they are mostly the exception, and many Private Equity and Venture Capital funds provide a valuable service.
Wikipedia describes these investment funds as:
'Private-equity capital is invested into a target company either by an investment management company (private equity firm), or by a venture capital fund, or by an angel investor; each category of investor has specific financial goals, management preferences, and investment strategies for profiting from their investments. Each category of investor provides working capital to the target company to finance the expansion of the company with the development of new products and services, the restructuring of operations, management, and formal control and ownership of the company.
Image by Tumisu from Pixabay
In addition to investments by high-net-worth individuals, these investment funds raise their capital from public and private pension funds, insurance companies, sovereign wealth funds (state-owned investment funds making a country’s assets work for their citizens) and even charities and charitable foundations. The chances are you are benefiting from PE/VC via you pension funds or insurance companies who invest their income to cover claims costs and to keep your premiums lower.
T
he British Venture Capital Association (BVCA), describe these funders as follows:
'Venture capital is focused on early-stage companies with high growth potential, private equity firms invest in a much wider range of companies. Often, they’re mature firms that have been trading for a long time but need access to funds either to fuel growth or to recover from financial difficulties. Private equity and venture capital delivers for both institutional investors, including UK pensioners, and for the wider economy by driving innovation, building British business, and supporting communities and individuals to succeed.
The common criticism of private equity is that it's parasitic and destroys jobs. But PE firms are incentivised to make companies more efficient, if a PE firm saddles a portfolio company with such a heavy debt burden that the company is unable to return a profit, the PE firm ultimately suffers.
Image by Tumisu from Pixabay
A private equity firm will hold a majority ownership stake in a company, with the management team also owning a significant share of the equity. The management team continue to run the business on a day-to-day basis with strategic guidance and support from the private equity firm. After a period of between three to seven years the company would seek an exit, either in the form of a sale to another buyer or a public listing. This can allow the founder to turn his or her investment into money, or an opportunity for a management buyout.
Private equity allows firms, including SME and mid-size businesses an alternative way to raise capital without going through the bank loan process or needing to place their companies up for public offer on the stock market. These structures allow businesses to focus less on quarterly performance and more on the overall growth and big picture.
Love them or hate them, they have a place in business that cannot be denied.
Ian Garner
Ian Garner is a retired Fellow of the Chartered Management Institute (FCMI) and a Fellow of the Institute of Directors (FIoD).
Ian is a Board Member of Maggie’s Yorkshire. Maggie’s provides emotional and practical cancer support and information in centres across the UK and online, with their centre in Leeds based at St James’s Hospital.
He is founder and director at Practical Solutions Management, a strategic consultancy practice and skilled in developing strategy and providing strategic direction, specialising in business growth and leadership.
