Читать книгу How To Become A Business Angel - Richard Hargreaves - Страница 14

The provision of venture capital in the UK evolved dramatically during the second half of the twentieth century.

In the 1970s, the principal source of venture capital in the UK was what was then called ICFC (now 3i). ICFC was started in 1945 with a government push and the backing of the then clearing banks. Its role was to provide long-term capital to private companies. ICFC dominated the market until the mid-1980s when independent venture capital firms (VCs) started to spring up like mushrooms.

These venture capital firms backed many start-ups and small ventures in the early days of the industry’s growth. Over time though most of the industry migrated upmarket to become today’s private equity groups because of the easier pickings. As a result venture capital for early stage companies became harder to find.

In contrast to venture capital, private equity groups typically buy – not back – existing large companies with predictable cash flows and partly use huge sums borrowed from banks to do so. They then hire new management who are incentivised with significant equity stakes.

The reasons for this are compelling from the private equity firm’s point of view. The large size of the deals means the management fees (1% to 2% on the capital raised from institutions) pay the private equity team fat salaries. Added to this are performance fees (typically 20% of profits made after the benefits – in good times – of heavy leverage from bank debt) that are also large on big and successful deals.

All of this means the private equity principals get rich provided they hire the right management to run their companies and the economy is stable so that leverage works for, and not against, them. The financial collapse in 2008 did, however, bring the risks of the highly leveraged deal into sharp focus.

Regrettably, today there is only a small and declining number of specialised venture capital firms who will consider investing in small start-up or early-stage ventures and they do very few deals.