£ Private equity firms all work in exactly the same way. First they raise funds from investors, usually company pension funds, but occasionally wealthy individuals. Having raised a fund of at the very least £50m (and sometimes as much as £1bn), the fund’s managers go out looking for companies to buy. They are interested in companies with a high growth potential with ambitious management. On each potential purchase, they put an immense amount of research and number-crunching work in to see if a profit is possible on the deal (most in the VC business are former accountants and investment bankers).
£When it comes to buying a company, the firms will go to lending banks to raise most of the money (often as much as three-quarters), the rest coming from its own funds. When it owns the company, it is interested in ways to cut costs, boost sales, and make profit. VC firms seek to increase a company’s value to its owners, without taking day-to-day management control. The company will need to sell some shares (generally a minority stake) to a venture backer, who may seek a non-executive board position and attend monthly meetings. When ready, the fund will sell it or float it. The VC firm will only exceptionally hold on to any company for more than five years.
£Private equity professionals usually take a personal stake in each deal they do – a practice called “sweet equity”. They share the profits of every deal, sometimes reaping millions from one deal. The majority of VC firms target companies requiring investment of £100,000, mainly in expansion stage. The overall average deal size in 1998 was £3.4m, although 56 per cent of companies backed in 1998 received sums of venture capital of less than £1m.