A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2008

INDUSTRY OVERVIEW

1.2

Private equity strategies and sectors

There are a variety of sectors within the private equity industry. Some private equity funds focus on a specific type of strategy or instrument, such as venture capital, buyout, fund of funds, mezzanine or distressed debt, while other private equity funds focus on specific industries such as real estate, clean technologies or infrastructure. All these sectors are further detailed in the section hereafter.

1.2.1

Venture capital

Venture capital is a strategy which consists of investing in start-up and early stage compa- nies with a business model based on new technologies or other innovations. Venture capital firms typically focus on identifying emerging industries and invest heavily in companies in these industries. In most cases these companies will be seeking to market a specific inno- vation, generally technology-driven. High-tech (31%), life sciences (16%) and energy (11%) are currently the top three sectors for early stage investments in Europe 11 . In other words, this strategy focuses on “building businesses” by investing in companies in the conceptual stage or companies where products have not yet been fully developed and where revenues and/or profits may be several years away. Thus, venture capital carries an increased level of risk since the investee companies are less established firms whose business models rely on unproven technologies or developing markets. In compensation, venture capital offers the prospects for high returns on investment if the investee compa- nies become successful and can finally be sold to strategic investors. Venture capital funds are the most popular private equity fund type in number worldwide. This can be explained by the numerous start-up companies launched every year, driven by government programs that seek to encourage enterprise creation, as well as by active business angels (i.e. private investors who invest in unquoted young entrepreneurial com- panies) in the United States. For these start-up companies, traditional debt financing is not always available since they generally lack the collateral, track record or earnings required to get a loan. As a consequence, they have recourse to venture capital. However, it should be noted that after the peak experienced towards the end of 2007, fund raising for venture funds declined worldwide in the past 2 years, in the context of the eco- nomic crisis. The venture capital industry is dominated by three big markets: The United States, Israel and the United Kingdom, which have developed in different directions. Whereas the US ven- ture capital industry is the oldest, the Israeli venture capital industry is relatively new and predominantly focused on high-tech. The UK venture capital industry is one of the oldest in Europe but it is less high-tech and early stage oriented than the US and Israeli industries 12 .

11 Source: EVCA, “Private equity and Venture capital in the European Economy – An industry response to the European Parliament and the European Commission”, 25 February 2009 12 Source: BVCA, “Benchmarking UK venture capital to the US and Israel: What lessons can be learned?”, May 2009

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