Private equity investments typically support management buyouts and managing buy-ins in mature companies, as opposed to venture capital which provides funding for early-stage and younger companies – more information about venture capital can be found here.
As a model private equity is a proven driver of sustainable business growth. This is achieved through operational expertise, sound management and, importantly, through the close working relationship between the private equity backer and the company management team.
British Business Bank - Private Equity
In contrast with publicly-listed companies, which can often have thousands of shareholders, private equity managers work alongside the management team to enhance the running of the business. This governance structure leads to much shorter lines of communication between manager and investor, ensuring constant engagement between the two.
This ‘active ownership’ approach means the private equity manager will work alongside the company management team to enhance the value in the business. This can involve all areas of operation, from the top-line growth, efficiency savings, cash generation and procurement, to supply-chains, marketing and sales, improving reporting and human resources.
Such an approach becomes self-perpetuating and ingrained within the company, ensuring that the business remains committed to creating value and increasing growth even after the private equity firm has sold its stake.
Private equity firms will typically look to hold investments for between four and seven years, at which time they will look to sell, or ‘exit’, their stake, either on the stock market, to a corporate buyer or to another investor.
Private equity firms, known in industry parlance as General Partners (GPs), typically raise money from institutional investors such as pension funds, insurance companies and family offices. This money is put into a fund structured as a limited partnership and which is managed by the GP and the capital is used to invest in companies, either for a minority or majority equity stake. GPs also invest their own money into the funds they manage. This is to ensure they have ‘skin in the game’, i.e. their interests are aligned with that of their LPs.
Private equity funds typically have a fixed life-span of 10 years and by the end of the 10 years they will have had to return the investors’ original money, plus any additional returns made. This generally requires the investments to be sold, or to be in the form of quoted shares, before the end of the fund.
It is the institutional investors in the funds – known as Limited Partners - who first receive any returns generated by a fund. It is only when these returns pass a certain point, known as the ‘hurdle rate’, that the GPs receive any return.
In order for GPs to be able to successfully raise funds from LPs, they need to be able to demonstrate a track record of delivering good returns from their previous funds. Private equity has a long and successful history of recording such returns, and were almost double that of UK pension funds and the FTSE All-Share over the last decade according to recent BVCA statistics.
In February 2007, the BVCA asked Sir David Walker to undertake an independent review of the adequacy of disclosure and transparency in private equity, with a view to recommending a set of guidelines for conformity by the industry on a voluntary basis. This review resulted in the publication of the Guidelines for Disclosure and Transparency in Private Equity in November that year.
The Guidelines require additional disclosure and communication by private equity firms and their investee companies where those companies meet the Guidelines criteria. In addition to the enhanced disclosure requirements, the Guidelines also include requirements for data to be provided by portfolio companies and private equity firms to the BVCA, valuation methods, reporting to Limited Partners, detail on gender diversity and the responsibility to ensure timely and effective communication during periods of significant strategic change.
The Guidelines Monitoring Group was set-up in March 2008 under the leadership of Sir Mike Rake to monitor conformity to the Guidelines. It was renamed the Private Equity Reporting Group (PERG) in September 2015 and publishes an annual report to summarise the industry’s conformity with the guidelines. More information about the group and the reports can be found here.
FOR FURTHER INFORMATION PLEASE CONTACT THE BVCA
+44 (0)20 7492 0400