A look at what is involved in venture capital (VC) and private equity (PE) when investing in a business.
September 30, 2019
Are you thinking about investing in a business? You may have heard of terms like “VC”, “PE” and “shares” before, but what do they mean and how can you use them to make a profitable investment? In the following sections, you will find out what is involved in venture capital, private equity and shares. You can then determine which financial area would be an excellent investment opportunity for you.
Venture Capital Investment
One of the best ways to make a profit on a business-investment is to become a venture capitalist. That involves putting money into a business that is at an early stage of operation and giving expert advice to that business. Your investment will allow the company to grow and become more profitable. Venture capital investors typically invest in cycles every five years or so. During those periods, you would expect the business to significantly grow so you can make a return on the funds you have provided. Alternatively, if you are looking for early-stage capital for a founder-led company, finding a venture capitalist may be your best bet. There are other types of investors that you can find to provide funding however, such as angel investors, search fund investors and growth equity investors. There are three primary venture capital schemes which encourage investment into United Kingdom businesses. These are the Seed Enterprise Investment Scheme, the Enterprise Investment Scheme and the Venture Capital Trust. The first two schemes provide tax breaks for investors, so there is an incentive to invest through either of those. However, the Venture Capital Trust scheme helps to reduce risk, so it also has its perks. The VCT scheme helps to avoid financial risk by pooling money from different investors and spreading it across a wide range of businesses.
Another excellent way of investing in a business is to become a shareholder in a company. Although these investments carry risks, they do offer the highest returns to investors. Shares are small elements of a company. If you own a share, you own a little part of the company, which means you own a proportion of the business’s value. You can buy shares yourself, or you can pool together money with others to make a collective investment. There are two ways you can make a profit from this kind of investment. Firstly, if the company becomes more valuable over time, the value of your share will increase as well. Secondly, many companies pay out a part of the firm’s profits at the end of each year. These are called dividends. You could, therefore, receive a handsome sum each year and gain a more valuable investment over time.
Private Equity Investment
Using funds raised from institutional investors, private equity companies acquire private businesses. Private equity firms typically obtain between ten and fifteen firms at any one time. They then invest in those private businesses to grow them over around three to five years. The aim is to sell the acquired companies for a profit, which creates profitable returns for the investors. Funds for private equity firms usually comes from investors like corporate pension funds, sovereign wealth funds and insurance companies. Today, investing in private equity is an essential part of institutional investors’ portfolios. There are currently around 1,200 private equity companies in the UK, which generate tens of billions of pounds in revenue. Private equity in the UK is becoming more popular with foreign investors too, especially investors from Continental Europe, the USA and Asia. That has helped the UK private equity market to grow a lot in recent times.