Private Equity or Venture Capital
Historically, Venture Capital investors provided high risk equity capital to start-ups and early stage companies while PE provided secondary tranches of equity and mezzanine investments to companies that are more mature in their corporate lifecycle. However, they both can be defined as medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies. In Europe today, many people use the term “Venture Capital” interchangeably with “private equity”. Venture Capital refers only to investments in start-ups and early stage companies.
Seed Capital to Start-ups
Many business-minded people have great ideas and they want to turn their ideas into reality. They need to work hard and remain enthusiastic. However, they also need confidence in their ideas from the outer world. They probably get that confidence from their families and friends but if they want to grow beyond that level, they need something else. That is when Venture Capital comes into play.
Venture Capital provides the necessary expertise and risk capital to allow start-up companies to grow even before they can access bank loans as banks are often reluctant to provide risk capital to start-ups. Banks instead need assets and steady cash flows to secure the repayment of loans things that obviously many start-ups lack.
The picture would be much different without Venture Capital investments, great ideas would be wasted in lack of capital. Some start-up companies, particularly the ones involved in research and development, may need years of investment before revenues are realized.
Growth Capital to Small and Medium-Sized Enterprises
It has been argued that the engines of the European economy are the small and medium-sized enterprises (SMEs). The vast majority of European companies can be categorized as SMEs. SMEs produce revenues and give jobs to millions of people. However, they lack the ability to access funding of larger businesses. The world of SMEs is the area of the economy where PE is the most active.
SMEs are the favourite targets of private equity investments. Private equity investors not only provide additional capital to cover working capital or other funding requirements but give guidance and share market experience with private equity backed businesses. PE investors actually work together with the management to make the business successful.
Private Equity and the Stock Market
Established businesses are well equipped to access capital through a variety of sources. Large companies can go public to access financing. Strict reporting requirements of the public markets, however, may have a chilling effect. What PE can offer to this end of the corporate spectrum is an active ownership structure, a renewed focus, international networks to support expansion into global markets, financial assistance in add-on acquisitions and strategic business expertise to make the business ever more successful.
As private equity and Venture Capital investors will eventually exit from the business at the end of the investment cycle, it is in their best interest to make the business more profitable and to increase its value. That is the reason why this ownership model is so powerful in contributing to economic growth and value creation.
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