9/June/09

What is Private Equity and how does it work?

In the current credit environment, companies are looking at private equity as a way to fund growth. ‘Private Equity’ is generic term that relates to the equity financing of unquoted companies at various stages of development.

‘Venture Capital’ is a subset of Private Equity and it focuses on investing in early stage and developing companies while private equity mainly refers to investing in established businesses. Private equity firms such as Enterprise Equity are sitting on cash, and could provide the money to finance organic growth or an acquisition programme.

As the term suggests, money is invested in the balance sheet of unquoted companies in exchange for an ownership stake. This may not represent majority ownership but private equity firms will seek to increase a company’s value to shareholders, without taking day-to-day management control.

Alongside money, private equity invests the time to transform businesses and provides the confidence management teams sometimes need to execute growth strategies. The other benefit is that banks, suppliers and customers will gain comfort from seeing the business externally endorsed.

But private equity may not be for everyone. The private equity investor needs to get their money out. Therefore at an early stage in discussions, there needs to be shareholder alignment in terms of achieving an exit, for example a sale of the business, in the medium term (on average 3 to 5 years).

This provides a perfect fit if the existing ownership is thinking about moving on, maybe to other ventures, or simply retiring – the logic being that while the existing owner may have a smaller ‘slice of cake’, within a few years that ‘slice’ should be worth considerably more than the ‘whole cake’ was prior to investment.

Craig Holmes is a Director with Enterprise Equity Fund Management (NI) Ltd which is authorised and regulated by the Financial Services Authority. For further information contact craig@eeni.com or visit www.eeni.com



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