Preface

Targeting

The most effective way of raising private equity is to select just a few private equity firms to target with your business proposition. The key considerations should be to assess:

1. The stage of your company’s development or the type of private equity investment required.
2. The industry sector in which your business operates.
   
3. The amount of finance your company needs.
   
4. The geographical location of your business operations.
   

You should select only those private equity firms whose investment preferences match these attributes. The BVCA Directory of members specifies their investment preferences and contact details. It also includes the names of some of the companies in which they have invested.

1. Stage/type of investment

The terms that most private equity firms use to define the stage of a company’s development are determined by the purpose for which the financing is required.

Seed
To allow a business concept to be developed, perhaps involving the production of a business plan, prototypes and additional research, prior to bringing a product to market and commencing large-scale manufacturing.

Only a few seed financings are undertaken each year by private equity firms. Many seed financings are too small and require too much hands-on support from the private equity firm to make them economically viable as investments. There are, however, some specialist private equity firms which are worth approaching, subject to the company meeting their other investment preferences. Business angel capital should also be considered, as with a business angel on a company’s board, it may be more attractive to private equity firms when later stage funds are required.

Start-up
To develop the company’s products and fund their initial marketing. Companies may be in the process of being set up or may have been trading for a short time, but not have sold their product commercially.

Although many start-ups are typically smaller companies, there is an increasing number of multi-million pound start-ups. Around half of BVCA members will consider high quality and generally larger start-up propositions. However, there are those who specialise in this stage, subject to the company seeking investment meeting the firm’s other investment preferences. Around 15% of companies receiving private equity each year are start-ups.

Other early stage
To initiate commercial manufacturing and sales in companies that have completed the product development stage, but may not yet be generating profits.

This is a stage that has been attracting an increasing amount of private equity over the past few years, accounting for around 20% of the number of financings each year by BVCA members.

Expansion
To grow and expand an established company. For example, to finance increased production capacity, product development, marketing and to provide additional working capital. Also known as “development” or “growth” capital.

More UK companies at this stage of development receive private equity than any other, generally accounting for around 50% of financings each year by BVCA members.

Management buy-out (MBO)
To enable the current operating management and investors to acquire or to purchase a significant shareholding in the product line or business they manage. MBOs range from the acquisition of relatively small formerly family owned businesses to £100 million plus buy-outs. The amounts concerned tend to be larger than other types of financing, as they involve the acquisition of an entire business. They tend to account for around 15% of financings undertaken each year by BVCA member companies.

Management buy-in (MBI)
To enable a manager or group of managers from outside a company to buy into it.

Buy-in management buy-out (BIMBO)
To enable a company’s management to acquire the business they manage with the assistance of some incoming management.

Institutional buy-out (IBO)
To enable a private equity firm to acquire a company, following which the incumbent and/or incoming management will be given or acquire a stake in the business.

This is a relatively new term and is an increasingly used method of buy-out. It is a method often preferred by vendors, as it reduces the number of parties with whom they have to negotiate.

Secondary purchase
When a private equity firm acquires existing shares in a company from another private equity firm or from another shareholder or shareholders.

Replacement equity
To allow existing non-private equity investors to buy back or redeem part, or all, of another investor’s shareholding.

Rescue/turnaround
To finance a company in difficulties or to rescue it from receivership.

Refinancing bank debt
To reduce a company’s level of gearing.

Bridge financing
Short-term private equity funding provided to a company generally planning to float within a year.

2. Industry sector

Most private equity firms will consider investing in a range of industry sectors – if your requirements meet their other investment preferences. Some firms specialise in specific industry sectors, such as biotechnology, computer related and other technology areas. Others may actively avoid sectors such as property or film production.

3. Amount of investment

Around 80% of UK private equity firms’ financings each year are for amounts of over £100,000 per company. There are, however, a number of private equity firms who will consider investing amounts of private equity under £100,000 and these tend to include specialist and regionally orientated firms. Companies initially seeking smaller amounts of private equity are more attractive to private equity firms if there is an opportunity for further rounds of private equity investment later on.

The process for investment is similar, whether the amount of capital required is £100,000 or £10 million, in terms of the amount of time and effort private equity firms have to spend in appraising the business proposal prior to investment. This makes the medium to larger-sized investments more attractive for private equity investment, as the total size of the return (rather than the percentage) is likely to be greater than for smaller investments, and should more easily cover the initial appraisal costs.

Business angels are perhaps the largest source of smaller amounts of equity finance, often investing amounts ranging between £10,000 and £100,000 in early stage and smaller expanding companies.

4. Geographical location

Several private equity firms have offices in the UK regions. Some regions are better served with more local private equity firms than others, but there are also many firms, particularly in London, who look to invest UK-wide. Over 20% of total investment is outside the UK and several private equity firms have offices located abroad.

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