What is the role of Venture Capital and Private Equity Institutions in the UK Financial Market? 

Whether your business is a start-up or has been trading for a few years, financial security is imperative to long term success. The UK financial market is one of the largest in the world, being the sixth largest global economy and biggest global market for OTC derivatives (Reference link). The performance of the market is dependent on various global economic trends, such as the COVID-19 pandemic, geo-political instability, or the introduction of drastic government policies on taxation and interest rates, to name but a few. 

Venture Capital (VC) and Private Equity (PE) are types of funding that can support a company to grow, or to support continuous trading. These institutions therefore play a vital role in the UK financial market as it provides companies who may not have access to traditional financing options such as loans or entering public markets, the ability to further expand. 

Private Equity versus Venture Capital 

There is common confusion between VC and PE funding. Both VC and PE are funding investments for private companies that will exit by selling their equity hold. However, dependent on the stage of the company, the appetite to risk and the depth of funding required will influence whether a company seeks funding from venture capitalists or a private equity firm. 

VC funding (or ‘seed capital’) is a form of private equity investment, that targets start-ups and companies in their early stages of development. Traditionally, venture capitalists invest in technology companies, but this is not exclusive. The cash injection from venture capitalists is non-leveraged and provided in exchange for a minority equity stake, rather than debt (Reference link). PE firms on the other hand invest in mature companies with established business models, in exchange for a controlling or entire equity stake. Unlike VC funding, PE investment will be a combination of leveraged and non-leveraged finance. 

Private equity and venture capital role in the financial market

The outcome of market factors is of key importance to private companies. The pandemic forced many companies to enter a period of digitalisation to reflect changing consumer behaviours and wider eco-political movements have encouraged companies to decarbonise and achieve ambitious net-zero sustainability targets.  It has therefore never been more important for companies to have secure financial investment to be able to adapt. 

VC funding can be a lifeline for young companies who are not able to access traditional bank lending. Not only will the VC fund invest cash to advance the company, but it will also provide a wealth of business connections and expertise to guide the company through its early stages when it is most at risk. 

As PE funds acquire either the whole or a controlling interest in the company, they will work closely with the existing management team to develop the business. Types of leveraged buyout include, MBO and MBI, BIMBO and Institutional. 

Fundamentally, private equity and venture capital funds promote economic growth and generate profitable returns for investors. 

How can Moore Barlow help

If you would like to explore Venture Capital and Private Equity funding further, get in touch with one of our corporate lawyers to discuss further.

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