Types of private equity investment

There are a number of different stages for investment in private equity: Seed capital, venture capital and buyout capital.

Seed funding is the funding of a start-up company or very early stage company. This is often the highest risk stage of the process and in recognition of this the government has introduced a special category of EIS called Seed EIS with enhanced tax benefits. Seed companies may be little more that a concept and require specialist help in getting off the ground.

Venture capital falls into 2 stages; second round finance and late stage finance.

Second round finance as the name implies is financing for companies that have already been established but are still at an early stage. Often the initial capital will already have been provided by friends and family and the company is at a stage when it needs capital to expand. Companies in this group often also qualify as Seed EIS.

Late stage finance suggests that the company is well established but looking for fresh capital to expand into new markets. These companies may have been profitable for many years and often represent significantly lower risk that seed or early stage companies.

Buyouts involve taking control of established companies with the objective of adapting the business strategy to grow the value of the firm. They will seek to do this by increasing earnings or reducing costs (i.e. EBITDA growth), reducing debt or simply buying out existing investors at an attractive price. They usually do not qualify as EIS investments, however are often the mechanism through which EIS investors exit their investments. Many institutional private equity funds specialise in buyouts, providing finance to management teams to buyout existing investors.

There are 2 other main exit strategies for EIS: initial public offering (“IPO”) and mergers and acquisitions (“M&A”). With IPO, the firm is sold to the public by offering its shares on a stock exchange and M&A the firm is acquired by or merged with a public or private company.