Private_Equity_Guide

AGuidetoPrivateEquityTheBVCArepresentsprivateequityandventurecapitalintheUKandisdevotedtopromotingtheprivateequityindustryandimprovingtheperformanceandprofessionalstandardsofmemberfirmsandtheindividualswithinthosefirms.BVCAmissionstatement•EachyearUKprivateequityfirmsprovideseveralbillionsofpoundstoform,developandreshapearound1,600ambitiousUKcompanieswithhighgrowthprospects.•Privateequitymakesmanagersintoowners,givingthemthefreedom,focusandfinancetoenablethemtorevitalisetheircompaniesandtakethemontotheirnextphaseofgrowth.•Privateequityiscommitted,longtermandrisksharing.Itprovidescompanieswithpersonalexperienceandastablefinancialbaseonwhichtomakestrategicdecisions.•UKprivateequityfirmsofferawiderangeofsources,typesandstylesofprivateequitytomeetmanydifferentneeds.•Agreatvarietyofbusinessesindifferentindustrysectorsbenefitfromprivateequity;fromhightolowtechnologyandindifferentdevelopmentstages,fromstart-uptolargeestablishedcompanies.•Inarecentsurvey83%ofprivateequitybackedcompaniessaidtheywouldnothaveexistedatallorwouldhavedevelopedlessrapidlywithoutprivateequity.Overthreequartersofthecompaniesfeltthattheirprivateequityfirmshadmadeamajorcontributionotherthantheprovisionofmoney.•PrivateequitybackedcompaniesoutperformleadingUKbusinesses.Overafiveyearperiod,onaverageprivateequitybackedcompaniesincreasedtheir:-salesby30%p.a.,morethanthreetimesthatachievedbyFTSE100companies-exportsby20%p.a.,comparedwithanationalgrowthrateofjust2.9%p.a.-investmentby25%p.a.,comparedwithanationalincreaseof2.3%p.a.•Privateequitybackedcompaniescreatejobsataconsiderablyfasterratethanotherprivatesectorcompanies.Overafiveyearperiod,thenumberofpeopleemployedbyprivateequitybackedcompaniesincreasedbyanaverageof23%p.a.,againstanationalprivatesectoremploymentgrowthrateofjust1.5%p.a.Itisestimatedthatprivateequitybackedcompaniesaccountfortheemploymentofaround2.9millionpeople,equivalentto16%ofthecurrentprivatesectorworkforce.Privateequity–investinginBritain’sfuture12PrefaceTheBVCArepresentsprivateequityintheUK.Itsfullmembersareprivateequityfirmswhichprovideequityfundingtogrowingunquotedcompaniesandaccountforover95%offormalprivateequityinvestmentintheUK.AssociatemembersoftheBVCAincludefirmsthatprovidemezzaninefinance,fundoffundmanagers,secondarypurchasers,acquisitionfinancehousesanddirectinvestorsintoprivateequityfunds,andalsolawyers,accountantsandotheradvisersexperiencedintheprivateequityfield,aswellaseducationalorresearchorganisationscloselyassociatedwiththeprivateequityindustry.TheBVCAisdevotedtopromotingtheprivateequityindustry.OneofthewaystheBVCAachievesthisisbyprovidinginformationtothoseseekingprivateequity.“AGuidetoPrivateEquity”isakeycomponentintherangeofBVCApublications.ForfurtherdetailsaboutotherBVCApublicationsandresearchseetheAppendixonpages56-58ortheBVCA’swebsite–sohewasdulyaskedtowriteit!ThefirstGuidewaspublishedinApril1992andsincethenmanytensofthousandsofcopieshavebeensentoutordownloadedontheBVCA’swebsite.ThisneweditionhasbeenupdatedbyKeithandthesectiononthebusinessplanfurtherenlarged.IwouldliketothankKeithforinitiatingtheGuideandforhiscontinuinghelpovertheyears.IwouldalsoliketothanktheExecutiveandinparticularSarahEatonfortheproductionofanotherexcellentGuide.RichardGreenBVCAChairmanJune2003BVCAMissionStatementInsidefrontcoverPrivateequity–investinginBritain’sfuture1Preface2Anintroductiontoprivateequity6Definition6HowthisGuidecanhelpyou6Whatisprivateequity?7Wouldmycompanybeattractivetoaprivateequityinvestor?7Someofthebenefitsofprivateequity7Questionstoaskyourselfbeforereadingfurther8Internalandexternalfinancialresources8Well-knownprivateequitybackedcompanies12Theadvantagesofprivateequityoverseniordebt12Privateequitycomparedtoseniordebt13Sourcesofprivateequity14Privateequityfirms14Wheredoprivateequityfirmsobtainthemoneytoinvestinmybusiness?14Howmaythesourceofaprivateequityfirm’smoneyaffectme?14HowdoIselecttherightprivateequityfirm?15Selectingaprivateequityfirm16Targeting16Stage/typeofinvestment16Industrysector18Amountofinvestment18Geographicallocation19Contents3Thebusinessplan20Essentialareastocoverinyourbusinessplan20Thepresentationofyourbusinessplan28Thingstoavoid29Theinvestmentprocess30Reachingyouraudience30Confidentiality30HowquicklyshouldIreceivearesponse?30Howdoprivateequityfirmsevaluateabusinessplan?31Presentingyourbusinessplanandnegotiations31Valuingthebusiness31Personalfinancialcommitment34Typesoffinancingstructure34Classesofcapitalusedbyprivateequityfirms34Otherformsoffinanceprovidedinadditiontoequity36Additionalpointstobeconsidered36TheOfferLetter37Theduediligenceprocess37Syndication38Completion38Additionalprivateequitydefinitions38Theroleofprofessionaladvisers40Thefinancialadviser’srole40Theaccountant’srole41Thel