You may need finance to grow your business – purchase machinery, recruit staff, research new delivery channels or step up to the next level.
Use our blog series to understand your choices for funding growth, and the advantages and disadvantages of each option.
Part 9: Equity Investment
Equity Finance is where new or existing companies raise money by selling part of their business to an investor.
Advantages of Equity Finance
- No monthly capital and interest repayments
- Benefit from Investor’s experience and contacts
- Risk shared with Investor
- Large amounts raised over several ’rounds’ to fuel fast growth
Disadvantages of Equity Finance:
- Lose equity in your business
- May lose control of the business
- May restrict how money is used
- Time and cost to arrange
- Differing objectives – investors look to exit in 4 -7 years with a good Return On Investment (ROI)
Types of Equity Finance
Private Equity
Private equity investments typically support management buyouts and managing buy-ins to mature companies.
They are medium to long term finance in exchange for an equity stake in a high-growth non-listed business, and are a proven model for growth.
Whilst publicly-listed companies have thousands of ”hands-off’ shareholders, private equity managers provide ‘active ownership’, working with the management team to enhance the business’ value.
This can include improvements in sales, efficiency, procurement, supply-chains, marketing, financial reporting and human resources.
Private equity firms raise fund money from institutional investors such as pension funds and insurance companies.
They invest in companies, for either a minority or majority equity stake, and typically hold investments for 4-7 years, then sell (‘exit’) their holding on the stock market, to a corporate buyer or to another investor.
For more information see https://www.bvca.co.uk/Our-Industry/Private-Equity.
For Investor listings and descriptions see https://startups.co.uk/investor-directory/.
Funds are raised by taking a company from private to public ownership. This is known as ‘floating’ or ‘going public’ – the company becomes a Public Listed Company (Plc).
A proportion of the company is offered for purchase as shares on the London Stock Exchange (LSE), Alternative Investment Market (AIM) or NEX Exchange (formerly ISDX, OFEX and PLUS).
The process is called an Initial Public Offering (IPO). It raises cash for business expansion and to give a return to investors and owners.
It can also provide greater prestige and profile, easier access to borrowing through bonds, better loan terms, and employee stock incentives.
However, external market pressure can lead to focus on short-term results at the expense of long-term strategy.
Becoming a public company is a very expensive and time-consuming process. Accounts must meet LSE standards, the business has to comply with market regulations, and thorough due diligence investigations into all its operations take place.
There are also ongoing annual audit costs, and requirements to provide regular public performance updates.
Various tax relief schemes are put in place by the UK Government, such as SEIS, EIS and SITR, to encourage investment into UK companies.
See HMRC’s website for up-to-date details: https://www.gov.uk/government/collections/enterprise-investment-scheme-and-seed-enterprise-investment-scheme-statistics.
For further information on equity see https://www.icaew.com/technical/corporate-finance/financing-change/private-equity-demystified-an-explanatory-guide-160216
and https://www.british-business-bank.co.uk/finance-options/.
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