Private equity is medium to long-term finance provided in return for an equity stake in potentially high growth, unquoted companies. It encompasses both “venture capital” (the seed to expansion stages of investment) and management buy-in / buy-out. If you are looking to start up, expand, buy into a business, buy your parent company, turnaround or revitalise a company, private equity could help you.
The main sources of private equity in the UK are the private equity firms (who may invest at all stages – venture capital and buy-outs) and “business angels” (private individuals who provide smaller amounts of finance at an earlier stage than many private equity firms are able to invest).
Typically, unless a business can offer the prospect of significant turnover growth within five years, it is unlikely to be of interest to a private equity firm. Private equity investors are only interested in companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality.
Mezzanine Finance is loan finance that is halfway between equity and secured debt, requiring either a second charge on the company’s assets or remaining unsecured. Because the risk is consequently higher than senior debt, the interest charged by the mezzanine debt provider will be higher than that from the principal lenders and sometimes a modest equity “up-side” will be required through options or warrants. It is generally most appropriate for larger transactions.