Private Equity - Background

The UK Market
The demand for equity capital arises from companies both small and large, privately-owned and quoted on a stock exchange, and in respect of businesses at various stages of their development.

The suppliers of equity capital in the UK fall into three main categories: -

• Institutional Investors - including banks, insurance companies, pension and other investment funds;

• Specialist Investors - such as private equity funds, regional development funds, venture capital trusts; and

• Private Investors - including private individuals, investment funds and companies.

The majority of equity investment in the UK, is in the larger mature businesses whose shares are quoted on a regulated market such as the London Stock Exchange.  These are lower-risk investments and their trading is within highly regulated and liquid markets.  Investors are mostly institutional although in recent years an increasing number of private individuals and funds also feature.

Private Companies
Equity investment in privately-owned companies tends to come from the specialist and private investors.  These investments are often in businesses that are smaller and in an earlier stage of their development and there exists no regulated trading facility for their shares.  They are perceived as higher risk, although with greater potential for substantial growth they provide the opportunity for higher reward to the investor.

The private equity houses (or venture capital houses as they were previously known) comprise companies managing their own funds and those managing the funds of external investors.  Some of these are independent and some are subsidiaries of large financial institutions such as banks and insurance companies.  They mainly invest in established businesses and as part of a structured finance package which will include a substantial level of debt finance provided by banks.  Because of the large costs involved in making and administering these investments, they tend to involve larger sums.  Most private equity houses will not invest less than £2 million in a company.

Regional development funds and the venture capital trusts are often managed by the managers of the private equity houses, although these will invest smaller sums.  Again these tend to be in established businesses avoiding the higher-risk start-ups and early-stage investments.  These funds are limited in terms of availability.

Investor Protection
The marketing of investment opportunities to prospective private investors is heavily regulated under the provisions of the Financial Services and Markets Act 2000.  This imposes controls over Investment Activity, including the marketing and execution of investments, and related advice.

Enforcement of the legislation is supervised by the Financial Services Authority.  Only intermediaries and advisers who are authorised by the Authority may undertake such Investment Activity.