The terms private equity and venture capital are often confused although they do have different meanings. The British Venture Capital Association website states that: "In general venture capital funds invest in companies at an early stage in their development when they often have little or no track record and are cash-hungry. In contrast, private equity funds invest in more mature companies with the aim to eliminate inefficiencies and drive growth."
From a legal perspective, there is little difference since the documentation will be similar and generally highly focused on protecting the investor's interests. For this reason we generally use private equity as an umbrella term to cover all transactions, from the investment by a venture capitalist to relatively small investments by third party individuals.
Private equity investment is sought in a variety of circumstances. For example a company could simply require funding to expand its business or it could be required to fund a management buy-out. It may be used in conjunction with bank funding in leveraged deals. Bank financing has been more difficult to secure since the economic downturn took hold. However, with the introduction of the Enterprise Finance Loan Guarantee scheme (which replaces the Small Firms Loan Guarantee Scheme), hopefully more companies will have access to bank borrowings.
An investor will want as many protections as possible and so will often insist on an "Investment Agreement" in which there are restrictions on how the company can run its business. However, this has to be balanced against the company's ability to run its business without having to seek the investor's approval before any decision can be taken. Primarily an investor wants to remain informed and does not want to receive any nasty surprises which could potentially have been avoided. Our lawyers can help determine a suitable compromise and help ensure a successful relationship between the investor and the other shareholders and directors.
Our team is highly experienced in this area and has been involved in the setting up of Finance Cornwall and Finance South West and also acting for some of the "Dragons" in their investments arising from Dragons' Den.
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