Venture Capital & Private Equity
Due to the McFaddens Securities being part of a large family office, we have access to certain venture capital and private equity situations. This is unique amongst Australian stock brokers and provides our clients with a solid source of diversification for their overall investment portfolios.
Venture capital (VC) is a form of investment for early-stage, innovative businesses with strong growth potential.
Venture capital provides finance and operational expertise for entrepreneurs and start-up companies, typically, although not exclusively, in technology-based sectors such as ICT, life sciences or fintech.
The main difference between private equity and venture capital comes down to the age of the company. Private equity will typically invest in a mature company, one which has been in operation for many years, if not decades.
Venture capital by contrast will invest in new companies, many, if not most, of which will not yet be making a profit, but which have a disruptive business offering with the potential of very strong growth. Businesses seek venture capital investment for a number of reasons, such as to grow their manufacturing and sales operations, enhance their product development and/or expand their business and hire new staff.
Many of the world’s best known companies began life with venture capital funding. VCs take minority stakes in businesses, very often alongside other VCs and investors. Early-stage companies raise money in ‘rounds’ – Series A, B, C etc – which will see further investment from either the same investors and/or new ones to support the company as it grows. Many start-ups will also receive funding prior to Series A, via angel investment, crowdfunding, grants, incubators or even friends and family.
Together, these form what is known as the ‘innovation eco-system’, a funding chain that provides capital and business expertise to early-stage, fast-growing companies at different stages in a company’s life. Venture capital houses typically hold their investments for between five and seven years, at which point the business will either be floated on the stock exchange, acquired by a multinational corporate or another investor such as a private equity house.
Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.
Private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods. In most cases, considerably long holding periods are often required for private equity investments in order to ensure a turnaround for distressed companies or to enable liquidity events such as an initial public offering (IPO) or a sale to a public company.