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Private Equity vs. Venture Capital vs. Investment Banking

  • Posted on: Thursday 1st February, 2018

Whether you are looking to sell a business, get investment into your business, buy a business or invest into one, there are a number of financing options that could be available to you. Three of the main forms of funding are Private Equity, Venture Capital and Investment Banking. Each of these is suitable for different types of businesses and funding opportunities.

Private Equity

Private equity groups are normally formed by a number of investors who combine their assets to provide investment into companies, often which are usually struggling or in distress. Venture capitalists may either buy a stake in a company or buy the company in its entirety. The main aim of a private equity group is to provide the investment required to add value to a company, either by investing in new technology, bolstering the balance sheet, making purchases or acquisitions, or to expand working capital. Once the company is running profitably then private equity investors would usually look to sell their stake and recoup a profit.

Private equity is often the funding provider behind Management Buy-Ins (MBI’s). These being where an investment group buys either a total or a managing stake in a floundering company, replaces the management team and then once the company’s fortunes have turned around, sells their stake for an, ideally sizeable, profit.

Private equity firms may also provide the funding required for Leveraged Buyouts (LBO’s). This financial tactic involves private equity groups providing large amounts of capital to finance large acquisitions. These can then be used as the basis for improving the company’s prospects. Generally during a LBO a large amount of borrowed money is also used resulting in what are known as junk bonds which have a debt to equity ratio of around 90% to 10%.

Venture Capital

This is a type of funding that is normally reserved for promising business start-ups that have the potential for successful and profitable growth if appropriate investment is provided. Venture capitalists invest into businesses which require investment to grow, often to bring a promising product or service to market. They take on a high level of risk, but for potentially high rewards. Once the business is profitable, venture capitalists have the option of selling their shares to private equity groups or investments banks etc.

Venture capitalists usually get shares in the business in return for their investment, and so a say in company decisions. This is an important method for venture capitalists to be able to protect their investment, as often the firms in which they are investing have little or no proven track record in business.

Venture capital funding is often provided by high net worth individuals also sometimes known as ‘Angel Investors’. These often tend to be recently retired business executives or successful entrepreneurs, who are looking to expand their wealth, but have the ability to commit to long-term investments.

Investment Banking

Rather than specifically investing into companies themselves, investment banks tend to arrange investment and financing for other businesses or organisations. There are several methods by which they can achieve this which include; aiding in the sale of securities, facilitating mergers and acquisitions strategies, underwriting new debt and equity securities, company reorganisations and stock management strategies.

Investment banks also help companies through the process of floating on the stock market by acting as middlemen during a company’s Initial Public Offering (IPO). The investment bank will negotiate with the company to buy all, or the majority, of its shares for an agreed price. They will then hopefully sell these on the open market for a marked up price. Through this type of deal the company gains assurance that their shares will sell and the investment bank could stand to make a large profit. However this can be a high risk strategy if the market fails to follow their analyst’s predictions.

For more information about selling, buying or investing in a business, contact the experienced and knowledgeable team at Selling My Business. With over 30 years’ experience in the business sales and funding sphere, they can provide you with potential investment opportunities and advise upon funding options.

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