Private equity: jargon-buster’s guide

Series Title
Series Details Vol.7, No.33, 13.9.01, p23
Publication Date 13/09/2001
Content Type

Date: 13/09/01

Venture capital is just one part of the EU's multi-billion-euro 'private equity' industry, which raises money from institutional investors typically for up to ten years.

The firms invest in groups of companies at different stages of their development - even before they are 'born' - in exchange for shares, or sometimes in the form of loans.

They also offer management advice and sit on the boards of firms in which they invest. They make a profit - or a loss - when they sell shares they own in the companies in which they have invested.

Seed: financing to research, assess and develop a concept before a business has reached start-up.

Start-up: financing for product development and initial marketing.

Venture capital: refers to early stage and expansion finance.

Management buy-out (MBO): Financing to allow the management team and investors to buy an existing product line or business.

RAMBO (rescue after an MBO): when an MBO goes wrong - for example because the price is too high or managers are not up to the job.

Management buy-in: financing provided to allow a manager or group of managers from outside a company to buy in to the firm, with the support of private equity investors.

Exit: the opportunity for investors to realise (ie. sell) their investment. Normally this occurs either through a trade sale or its flotation on the stock market.

Private equity: provides equity capital to firms not listed on a stock market. Dog: a bad investment. Pearl/gem: a good investment. Dingo: don't invest - a no-growth opportunity.

How much? In 2000, €35.9 billion was invested in EU firms by the European private equity industry: €19.6 billion in venture capital; €14.4 billlion in buy-outs and buy-ins and €11 billion in 'high technology'.