1. What is private equity and venture capital?
Private equity and venture capital firms provide long-term equity finance to unquoted companies. They invest money in the form of shares or a combination of shares and shareholder loans. These companies are not quoted on public stock markets which is why it is called private equity. There are two different type of funds - venture capital funds and buy-out funds. Most practitioners use private equity as the overall concept and see venture capital is considered as part of private equity.
2. What is the difference between venture capital and buy-outs?
Venture capital funds invest in companies at an early stage in their development often with little or no track record. Within venture capital we also include growth capital or expansion capital which aims at existing and mature businesses to accelerate their expansion. In contrast, buy-out funds invest in more mature businesses. In all cases the private equity firm is always looking for a high quality management team with a credible plan to grow the business. Private equity investors usually own the business for a number of years, during which time they work with the company's management at improving the company's performance, operations and strategic direction.
3. Is private equity a better form of ownership than quoted markets?
Private equity is not better or worse - it's a different way of owning companies. The two forms of ownership are complementary. In some circumstances private equity may be better suited and in some cases public ownership may be better suited. In private equity, the governance structure and the alignment of interest between owner and manager makes it easier to turn round companies or develop them. After all, many IPOs (initial public offerings) are of private equity-backed companies.
4. Who invests in private equity funds?
Private equity funds are funded by a different range of investors who are drawn to the industry because of the high returns offered. In Belgium, a lot of funds are so-called "captive funds" which means that they are sourced from a single parent, including the major banks and some industrial/financial groups which have dedicated private equity businesses. In addition, there are a great many of independent funds that receive investments from individual investors and companies, some of which are quoted companies. There are also a couple of funds backed by government or semi-government money. This Belgian situation is very different from most other countries where funding from private equity is primarily sourced from pension funds and insurance companies.
5. Is it true that takeovers by PE companies lead to job losses?
No, all evidence suggests the industry creates jobs. There have been a great many of studies that demonstrate that private equity backed companies create much more jobs than comparable companies. An impact study carried out by the BVA in 2006 demonstrated for Belgium that job growth is much higher as well as the quality of jobs in Belgium. This is explained by the fact that private equity backed companies invest more than other companies. This is actually in with observations in any other country. A study carried out by AT Kearny for Europe and the US concluded that private equity creates more value and more jobs.
6. Is it true that private equity just buys companies to break them up or squeeze down short term costs to make a quick buck?
No, that simply is not true. Private equity firms have no interest in destroying a business when its long term profitability lies in improving and developing it. The business model of private equity is to buy companies or acquire a stake in a company with the idea improve the business and create value in order to sell it, many years later, with a nice profit. Private equity's successful track record can only be achieved through creating better businesses that are demonstrably more valuable and hence attractive to another purchaser or to the Stock Market.
7. Why would a public company want to turn private?
The attractions of private equity investment to a company and to management are the opportunity for management and, in fact, all employees to own a significant portion of their business. A sense of ownership is at the heart of private equity investment. It also ensures alignment of interests between the shareholders, management and employees.
Not only that, but businesses can really benefit from private equity involvement. Fund managers are very active investors and they sit on the companies' board and bring with them experience and insight. Decisions can be made rapidly and for the long term with all investors represented around the Board Table.
Private equity investors are interested in long term growth rather than short term price developments. Private equity investors commit their money for a number of years and their capital is returned when the company pays dividends, is sold, IPOed or refinanced.
Many of the companies responding to a recent BVCA survey felt that their private equity firms had made a major contribution beside the provision of money. Contributions cited by private equity backed companies included private equity capital firms being used to provide financial advice, guidance on strategic matters and for management recruitment purposes, as well as providing access to their contacts and market information.
8. What about debt - why is it required?
Almost every company, public or private, has a capital structure made up of equity (stocks) and debt (bank loans, bonds, etc.). When a private equity firm invests in a company, they arrange financing which is made up of equity they invest from their funds and loans from a variety of different sources.
The level of debt appropriate for a particular company is a function of the general economic outlook and the nature and needs of the business itself. A young developing company may have no debt funding, whereas a mature company with a strong cashflow can comfortably sustain a high level of debt in its capital structure.
9. Who benefits from private equity?
The benefits from private equity are felt beyond the immediate circle of investors in the wider society.
All types of workers benefit from the higher profits earned by private equity and from the long-term job creation resulting from private equity investments.
The economy as a whole benefits from the new, innovative companies created ; the mid-sized companies that have access to equity funding to grow and the large private equity backed companies that remain dynamic and globally competitive.
A survey carried out in the UK (by our peers from the BVCA) demonstrated that 92% of private equity-backed companies responded that they could not have existed or would have grown less rapidly without private equity investment.
10. What is the difference between private equity and hedge funds?
Generally, private equity seeks to create value over the long term whereas hedge funds have a shorter timeframe. Private equity investors usually buy and own all of a company and help it to realise its growth potential over time and only succeed if the company does well. Hedge funds are pools of capital that usually invest in stocks, bonds or commodities. Generally they do not purchase a controlling interest in the company. Hedge funds try to capitalise on short term gains, using complicated trading strategies involving options and other derivative financial instruments. In some cases they bet against the shares of the companies they do not own, hoping to profit from a falling price.
11. What is the BVA's role?
The BVA is the industry body for private equity and venture capital businesses active in Belgium. Our membership of 70 firms represents the vast majority of Belgium-based private equity and venture capital providers and their advisers. The BVA has almost 20 years of experience representing the industry. The BVA is the interlocutor for the government, the media, regulatory and other statutory bodies at home.. We promote the industry to entrepreneurs and investors, as well as providing services and best practice standards to our members. At the European level, the BVA works closely with EVCA, the European Private Equity and Venture Capital Association.