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Private Equity Funds

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Private Equity Funds

One of the many casualties of the subprime crisis has been the brake on bank lending. Almost worldwide, banks and highstreet lenders are now extremely reluctant to release funds to borrowers. While just a short time ago, credit institutions were almost queuing up to offer clients money, private individuals and corporate entities are now finding it increasingly difficult to obtain finance for even small enterprises. For those looking for finance, particularly large-scale and/or for commercial purposes, private equity funds offer an alternative means of obtaining capital.

Private equity funds made their first main appearance on the world financial stage in 1946 when Georges Doriot, widely considered to be ‘the father of venture capitalism’, founded the American Research and Development Corporation (ARDC). Since then, private equity funds have established themselves as a main source of funding throughout the world. According to the European Private Equity and Venture Capital Association, private equity and venture capital funds have invested €270 billion in over 56,000 companies in Europe since 2000.

Private equity funds are established when a group of investors form a fund, which is then invested in a portfolio. Investors come from a variety of backgrounds and typically include public pension funds, corporate pension funds, high net worth individuals, family offices and insurance companies. The investment period for the private equity fund generally lasts for a fixed period of 10 years, although many funds are extended for subsequent annual periods.

There are many benefits of using private equity funds as a means of financing a project or development including access to long-term capital and an investment fixed within a framework of a negotiated contract. However, as Ken Thorkildsen, Director of Obelisk Private Finance, points out, perhaps the greatest advantage is that private equity allows the risks and profits to be shared between the fund and the borrower, something that is not an option with a loan from a bank or credit institution.

“An additional plus is also that the private equity fund may be able to assist with subsequent financing operations,” says Ken. “This is an important consideration for an entrepreneur or company with expansion plans for the future.”

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