An introduction to private equity
What is private equity?
Private equity is medium-to long-term finance provided to private or unquoted companies in return for an equity stake. It’s a well-established source of funding that complements bank loans, government-backed loans and investment by individual “business angels”, and provides an alternative to a listing on the stock market. Most private equity is provided through independent firms, such as ISIS, which raise funds from investors, select investments, structure deals, and provide ongoing support to the businesses in which they invest.
What kind of business ventures does private equity fund?
When most people think of private equity, they think of venture capital funding for start-up and early-stage businesses. However, many private equity firms - including ISIS - do not provide early-stage funding. Instead, they invest in established businesses looking for development capital to fund acquisitions or expansion, replacement capital to free up personal wealth without selling the business outright, or funding for a management buyout by the existing management team from the current owners or a management buy-in by a management team from outside the business.
What impact does private equity have on the UK economy?
Each year, around 1600 UK companies make use of private equity, with investments ranging from a few hundred thousand pounds to hundreds of millions of pounds. Companies funded by private equity typically outperform their peers in terms of both growth rate and profitability. For example, over a five-year period to 2003/4, businesses backed by private equity grew sales by an average of 23 per cent per annum. That’s more than twice the rate for FTSE 100 companies. At the same time, the number of staff they employed grew by an average of 20 per cent a year compared with a national average of 0.6 per cent. And a recent survey found that nearly four fifths of businesses backed with private equity said they would have developed less rapidly without that source of funding.
How does private equity funding work?
Private equity provides funds in return for an equity stake in the business. Deals, especially in the case of management buyouts or buy-ins, are often structured so that managers are asked to invest only a relatively small amount initially, but can see the value of their investment grow rapidly if the company thrives. This is usually achieved through “gearing”. Some of the funding is borrowed from a bank and is repaid out of the cashflow for the business, increasing the value of the shares as the loans are paid off. At the same time, the private equity funding itself usually carries an element of redeemable funding in the form of loan notes or preference shares. These are repaid over the long term, either from cashflow or on a refinancing or when the business is sold on exit. This allows the private equity firm to provide more capital, while taking a smaller equity stake itself; as a result, the management team receives an equity stake that is proportionately larger than their investment. ISIS is experienced at structuring deals for the benefit of all parties, understanding that we achieve the best returns for our investors when founders, entrepreneurs and management teams are given strong incentives to increase their own personal wealth by delivering long-term success for the business.
Who uses private equity and why?
Entrepreneurs use private equity to fund expansion and grow the value of their businesses. Founders and owner managers use private equity to release personal wealth tied up in their business through a partial sale, to exit the business entirely, or to buy out other partners. Management teams use private equity to buy out a company from the current owners - either the original founders or a large parent group looking to divest non-core divisions – or to buy into a business that the current owners are looking to sell.
What should I do if I think private equity is right for me?
If you think private equity funding could help you and your business become even more successful, and you meet our investment criteria, please contact: Tim Richardson +44 (0) 20 7506 1112 | tim.richardson@isisep.com for a confidential informal chat.
ISIS EQUITY PARTNERS, 100 WOOD ST, LONDON EC2V 7AN TEL +44 (0)20 7506 5600 www.isisep.com
ISIS EP LLP is Authorised and regulated by the Financial Services Authority (FSA).