Venture capital

Private equity (PE) funding is a general term for investments in private businesses - usually financed from a fund set up by big institutional investment companies.

Venture capital (VC) companies draw on private equity funds to invest in new businesses with high growth potential, eg technology start-ups. In exchange, they take part of the business' ownership, making a profit when they sell their stake and exit the company. VC's typically invest in businesses with:

• a minimum investment need of around £2 million, though smaller regional VC organisations may invest from £250,000
• an ambitious but realistic business plan
• a product or service that offers a unique selling point or other competitive advantage
• a large earning potential and a high return on investment within a specific timeframe, eg five years
• sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business' strategy

Business angel investments are another form of PE investment, where wealthy individuals use their own money to invest in small companies with growth prospects - see business angels.

The BVCA provides further guidance on venture capital.

Types of PE funds

Many PE funds specialise in a geographical area or industrial sector, while a few serve general investment purposes. PE funds usually have an initial lifespan of ten or more years.

There are four main types of PE funds:

• Independent funds - the most common form of PE fund. Their capital is supplied by third parties, with no one party holding a majority stake.
• Captive funds - have one major shareholder, contributing most of the capital. A captive fund can be a subsidiary of a bank or an insurance company, or an industrial company looking to invest in its own sector.
• Semi-captive funds - have a majority shareholder, but also significant minority shareholders. They can be subsidiaries of financial institutions or run as separate companies.
• Public sector funds are made up of capital supplied partly or completely by the public sector.

Find out more about private equity.