What is private equity and venture capital?
How forms of private equity such as venture capital and business angels are used to invest in private companies.
Private equity (PE) funding is a general term for investments in private businesses - usually financed from a fund set up by big institutional investment companies.
Venture capital (VC) companies draw on private equity funds to invest in new businesses with high growth potential, eg technology start-ups. In exchange, they take part of the business' ownership, making a profit when they sell their stake and exit the company. VC's typically invest in businesses with:
- a minimum investment need of around 拢2 million, though smaller regional VC organisations may invest from 拢250,000
- an ambitious but realistic business plan
- a product or service that offers a unique selling point or other competitive advantage
- a large earning potential and a high return on investment within a specific timeframe, eg five years
- sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business' strategy
Business angel investments are another form of PE investment, where wealthy individuals use their own money to invest in small companies with growth prospects - see business angels.
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Types of PE funds
Many PE funds specialise in a geographical area or industrial sector, while a few serve general investment purposes. PE funds usually have an initial lifespan of ten or more years.
There are four main types of PE funds:
- Independent funds - the most common form of PE fund. Their capital is supplied by third parties, with no one party holding a majority stake.
- Captive funds - have one major shareholder, contributing most of the capital. A captive fund can be a subsidiary of a bank or an insurance company, or an industrial company looking to invest in its own sector.
- Semi-captive funds - have a majority shareholder, but also significant minority shareholders. They can be subsidiaries of financial institutions or run as separate companies.
- Public sector funds are made up of capital supplied partly or completely by the public sector.
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