The Private Equity Cycle

Investment

The following are the most common types of private equity investment:

Seed
Seed financing enables an entrepreneur to develop a business concept and push it further towards the eventual launch of a new company. Such funding may assist the development of a business plan and the creation of prototypes, with the aim of bringing a product closer to market.

Projects that require Seed Funding are often too small to be of interest to venture capital or private equity firm, and will be of greater interest to one or more High Net Worth Individuals (HNWI) - also known as Business Angels - who can help develop the business to a stage where it may become a viable investment opportunity for a venture capitalist when further funds are required.

Start-Up
As the term suggests, start-up financing is aimed at helping a company begin operations. This usually means helping it develop its products and finance its initial marketing. One of the main focuses of start-up financing is to drive product development to the commercial stages.

Early-Stage
Early-stage funding is usually to kick-start a company’s commercial manufacturing and sales operations Early-stage companies will usually not be generating profits.

Development or Growth Capital
This is capital that is employed to expand a company’s operations. Development capital will usually be applied to reasonably well-established business, for example, to increase production capacity, product development, marketing and to provide additional working capital.

Management Buy-Out (MBO)
An MBO is where a current operating management team, backed by a private equity house, purchases a significant shareholding in the business. The amount of capital needed for an MBO is usually larger than other types of financing, as the deal involves the acquisition of the entire business.

The structure of an MBO usually involves the use of bank debt, and a member of the private equity firm will normally take a seat on the board of directors.

Management Buy-In (MBI)
This is similar in structure to an MBO, but the private equity house will bring in an external  management team from outside the company to buy into it.

Buy-in Management Buy-Out (BIMBO)
A hybrid of an MBO and MBI, the company’s management acquire the business they manage and one or more new managers are brought in to assist them.

Institutional Buy-out (IBO)
To enable a private equity firm to acquire a company, following which the incumbent and/or incoming management will be given or acquire a stake in the business. This is a relatively new term and is an increasingly used method of buy-out. It is a method often preferred by vendors, as it reduces the number of parties with whom they have to negotiate.

Secondary Buy-Out
This is when a private equity firm acquires a business from another private equity firm. One of the main reasons for this transaction is that the vendor has grown the business to a stage where it can be better handled by a private fund with a larger pool of capital available, who can in turn take the business to the next stage in its development.

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