Private equity provides equity capital to enterprises not quoted on a stock market. Private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company’s balance sheet. Private equity provides equity capital to enterprises not quoted on a stock market. Private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company’s balance sheet. A subset of private equity called Venture Capital refers to equity investments made for the launch, early development, or expansion of a business. Private equity uses different types of instruments when investing or acquiring businesses. The most used instruments are equity (typically shares) or quasi-equity instruments (typically subordinated securities with equity kicker).
Investment fund managers also have a wealth of experience in the development and guidance of growth companies. These competencies, together with their large network of contacts, allow them to assist companies in:
- devising its strategy,
- preparing for the growth of the company and providing access to new markets,
- obtaining other forms of financing (like investment loans or other types of credits), which becomes much easier once the capital structure of the company is reinforced,
- optimising the performance by focusing on operational excellence, enhancing the professionalisation of the management
Private equity, which also includes Venture Capital, forms a category of financial assets alongside shares in publicly listed companies, bond loans, real estate, or other forms of investing money. The different categories of financial assets are distinguished from one another on the basis of the different levels of risk and the expected returns. This type of investment should however not be confused with hedge funds which apply an entirely different investment philosophy with other goals. PE and VC invest in companies mainly in order to help them start, grow and develop with a long-term objective (on average 5 years), whilst hedge funds invest in a wide spectrum of financial assets (such as shares, bonds, options, etc.) on different markets, often for strictly speculative purposes with a short investment horizon (ranging from a few days to a maximum of 3 years). Moreover, PE and VC managers take an active role in the management of the companies, which is never the case for hedge funds.
In order to outline the context and the prevailing customs within the sector, the BVA has drawn up a 10-point code of conduct. It is a charter that expresses the general principles for the activities of the funds. The Board of Directors of the BVA ensures that its members respect these rules.
- Sustainable value creation
Parties who are active in providing risk capital (or related areas) have a function in building, in a sustainable way, the strength of portfolio companies in order to create value.
- Active involvement in the interest of the portfolio company
This sustainable creation of value shall be realised through an active shareholdership with the portfolio company. This involvement shall serve the interest of the portfolio company.
- Source of investment
The applicable laws regarding money laundering are to be strictly complied with. Investment of an unspecified source or investment that, directly or indirectly, stems from criminal acts or organisations shall not be accepted.
- Use of investment
No investment shall be allocated to companies active in domains such as illegal narcotics, human trafficking, social exploitation, organized crime or any other domain that the board of directors of the BVA judges incompatible with applicable regulations.
- Integrity and trust
Relationships among members and between members and other parties concerned shall be based on integrity and trust, whereby the highest ethical standards shall be applied. Members shall behave in an honest and trustful way by making clear promises and agreements, honoring them and not escaping their responsibility. Competitive advantage and business success shall be pursued by excelling in skills. The use of fraud, deception, manipulation or unfair practices as defined under applicable law are unacceptable.
- Observation of laws and regulation
Members shall comply with the laws and regulations applicable to their activities (irrespective of the jurisdiction) and ensure that this is also done by portfolio companies. Within portfolio companies, members will not tolerate practices of fraud, corruption, false competition and other crimes (e.g. of a social or fiscal nature).
Members shall treat the information they obtain from portfolio companies or companies searching for private equity or venture capital with caution, shall respect its confidential nature and shall use that information only for purposes of making or managing a (potential) investment or divestment.
- Monitoring and control
Members shall put in place mechanisms for internal and external monitoring and control, in their own organization and their portfolio companies, adapted to their size and activities and they shall fully cooperate in the exercise thereof.
Members shall communicate in an open way with parties they act with (to the extent not restricted by obligations of confidentiality). Providers of private equity and/or venture capital shall regularly account for their activities towards their investors and shall inform them in a timely, relevant and adequate way about the exercise of their activities including the related risks and conflicts of interest.
- Respecting the image of the private equity and venture capital sector
Members shall abstain from acts that may damage the image of the private equity and venture capital sector as promoted by this Code of Conduct and the BVA. They shall engage themselves to cooperate to a constant professionalization of the sector.
European Venture Capital Association – Invest Europe