What is equity?

In recent years the number and amount of equity being used by the region’s businesses has been low when compared to other UK regions. This is not solely due to the lack of investment opportunities but can also be attributed to the “distance” of the region from existing sources of investment capital. The purpose of the folder and the following section is to help provide detailed benefits of allowing investors to take a stake in a business as well as identify some of the potential sources focused on the region.

What is equity/venture capital?
What is equity used for?
What are the benefits of venture capital?
How have companies benefited from equity investment?

What is equity/venture capital?

Private equity provides equity capital to enterprises not quoted on a stock market. The primary sources are venture capital firms and business angels who seek long term investment (between 3 and 7 years) in companies which are capable of high growth.

What is equity used for?

Private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions or to strengthen a company’s balance sheet. Venture capitalists do not get involved in the day-to-day management of a business but will assist with long-term strategies.

What are the benefits of venture capital?

Venture backed companies have been shown to grow faster than other types of companies. This is made possible by the provision of a combination of capital and experienced personal input from venture capital executives, which sets it apart from other forms of finance. Venture capital investors not only provide equity capital, but experience, contacts and advice when required. Venture capitalists often work in conjunction with other providers of finance and may be able to help to put a total funding package together.

Although the venture capitalist takes a ‘slice’ of the business away from the owner leaving him with a smaller ‘slice’ of his business, within a few years the owner’s ‘slice’ should be worth more than the whole business was before.

On average private equity backed companies increased:*

• sales by 21% p.a., more than twice that achieved by FTSE companies
• exports by 11% p.a. compared with a national growth rate of just 3.3%
• investment by 21% p.a. compared with a national increase of 5.4%

Would it be beneficial to your business?

The following questions give you some guidance to help with a decision when to seek venture capital:

• Does your company have high growth prospects and are you and your team ambitious to grow your business rapidly?
• Does your company have a product/service with a competitive edge or unique selling point?
• Do you have relevant industry sector experience?
• Does your business have a team with complementary areas of expertise, such as management, marketing, finance, etc.?
• Are you willing to sell some of your company’s shares to a venture capital investor?

*figures refer to 2002/2003

How have companies benefited from equity investment?

North East Equity Matching Fund

Durham Pipeline Technology Ltd is a technology business which originally spun-out from Durham University. The company has developed technology applicable to the design of pipeline tractors for use in the water, chemical, nuclear and oil industries. The ‘pigs’, which are designed and built by the  company, use two sets of bristles to propel themselves along pipelines and recently a pig has been developed which uses a turbine to generate its own power from whichever liquid is in the pipeline. The company developed world-leading technology allowing access to difficult areas without disrupting production. NEEF, an Early Growth Equity Fund, was part of the first round of equity provided to the company from external sources as the management team had already invested.

The benefits to the business:

• Having to pass a rigorous examination of the management team and business model
• Essential early stage funding at the right time which was accessed in a relatively quick and cost effective manner at a crucial stage of the company’s development
• Equity strengthened the balance sheet
• The fund manager was able to offer specialist advice in
  accessing other forms of finance, e.g. grants, the Small Firm Loan Guarantee Scheme
• The company can access advice regarding forward planning and future funding options
• The company has to comply with financial disciplines imposed by the fund which include the production of monthly management accounts and timely year end accounts
• The fund manager is seen as a friend who will attend board meetings from time to time and, in conjunction with his support team, can offer advice covering many key areas of the business, e.g. identifying training needs
• The fund manager can help identify and introduce additional management expertise, if necessary
• The company can access second round funding from the same fund up to a maximum of £200,000

Business Investor Group (BIG)

Eclipse Translation Ltd is a translation company that specialises in translating legal, financial, medical, technical, commercial and defence-related documents in a secure environment. It also provides interpreting services and language training. It was incorporated in December 1996 and rapidly grow into the largest translation company in the Northern half of the UK. The company came into contact with the Business Investor Group (BIG) in 1998 via the referral of a retired Merchant Banker who was aware that the company was seeking external support. That support was needed to facilitate further sustainable and profitable growth and to achieve its goal of becoming No 1 in the UK and a major player in Europe. The response from interested BIG members was swift and following detailed discussions and appropriate due diligence an investment was concluded in November
of the same year.

Whilst equity was important, the clear benefit to the business, above other funding organisations, was the BIG formula of Equity and Expertise.

The benefits to the business:

• Identifying and freeing up the key skills of the Managing Director and creating a Board of Directors consisting of experienced individuals with supporting skills and a personal stake in the business
• A three-fold rise in turnover
• Higher growth level compared to the previous year
• Strengthened balance sheet
• Higher profitability
• Purpose-built European Translation Centre, a one-acre site on the outskirts of Alnwick to accommodate future expansion

The return to the investors was not determined in terms of a specific time limit. It was agreed that Business Investment Group would only seek a return on their investment when both the expectations of the Managing Director and the BIG were achieved. The business has therefore been built upon solid financial and management foundations. Therefore when the investors exit, it is expected they will have developed a company capable of continued growth, profitability and sustainability with a well-trained workforce and strong energetic management.