Private-equity financing for SMEs

Private-equity firms are a regular feature in newspaper headlines. But what is private equity, exactly? And what can it do for you, as a small or medium-sized business owner, start-up, or scale-up? ‘Private equity’ means acquiring funds in exchange for some amount of equity in your company. So basically, traditional financing is like a loan, and private equity is trading equity for capital.

Listed companies such as Shell and ABN AMRO issue shares on the stock market and raise money this way. As a non-listed business, you can contact your bank for a loan, or, alternatively, private investors or alternative financiers. Private investors generally provide finance by buying shares in your business. 

Risk of private equity

Private equity is an umbrella term for various forms of financing. It is venture capital. It is money that is in a company through the issuance of shares. Shares can become worth more or less. The risk is for the financier who is a shareholder. 

Profit

In return for the risk, there is a reward. A private equity investor or private equity fund wants to grow your company so that it becomes worth more. After a number of years, the private equity financier sells his shares for a higher amount. That is the earnings model of private equity.

Types of private equity 

Business angels

A business angel is someone who, either alone or with others, invests in businesses for a minimum of €50,000. The business angel is, or was, an entrepreneur themselves, who has the knowledge and experience to assist and support you. You can find business angels – also known as ‘informal investors’ or ‘angel investors’ – through Dutch and international networks. 

Venture capital

A venture capital fund is an investment fund or venture capital firm focusing on high-risk investments in new, innovative, and/or fast-growing businesses. Venture capital funds make investments of a minimum of €200,000. Many venture capital funds are members of the Nederlandse Vereniging van Participatiemaatschappijen (NVP) and focus on a specific sector or industry. 

Seed Business Angel fund

A Seed Business Angel fund is a separate type of venture capital fund. Half of the funds are sourced from private investors, while the other half is provided by the Ministry of Economic Affairs and Climate Policy. These types of funds focus on innovative start-ups, which have been established no more than 5 years ago. The Netherlands Enterprise Agency (RVO) provides a list (in Dutch) for each sector and industry. 

Private-equity firms (participatiemaatschappijen)

Private-equity firms (in Dutch) manage the assets of institutional investors such as pension funds and insurers, investments funds, and banks. The assets – which may range from tens to hundreds of millions – are tied up in a fund. Through this fund, the private-equity firm invests anywhere from €250,000 to millions of euros in high-potential businesses.

Regional Development Agencies (ROMs)

Regional Development Agencies are private-equity firms funded by a provincial authority. These start investing from €50,000. 

Make your choice

You choose a private equity financier based on the amount you need. Moreover, you pay attention to the working methods of the different investors. Which working method best suits your way of working? And what does your company need? Put everything in order for yourself. Keep in mind that a private investor always wants time and attention from you. You also need to be able to offer this for a successful collaboration.

When does private equity provide opportunities?

Private equity is an option in the following cases:

• The start of innovative businesses with a relatively high risk (start-ups)
• Growth of non-listed businesses, for example through a takeover/acquisition or internationalisation
• Management Buy Out (MBO): the current management buys the business, or a portion of the company becomes independent
• Management Buy In (MBI): new management from outside the business buys the business
• Bridge financing
• Business sale

Advantages and disadvantages of private equity

Private-equity funds do not just provide you with financial support alone. Private-equity funds and investments funds actively use their networks, knowledge, and entrepreneurial experience to help your business grow. On the other side, in exchange for shares, the financier is given a say in how the business is run. This can potentially result in changes in the organisational structure, strategy, management, and employees. 

Prepare your application

To help you while preparing your funding application, you should use a business plan, annual results, and the Business Model Canvas. 

Enlisting help

Getting others to help you increases your chances of obtaining funding. And with the right advisor and a good financial rationale, you will get your finance application approved in no time. These advisers will help you get started.