Why it's high time we made private equity less private

 
James Codling
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Alternative finance is making waves across a traditional sector which has always been the preserve of the ultra wealthy (Source: Getty)

The alternative finance revolution is making waves. There’s been much talk about how it is challenging the banks. Now its impact on the investment world is starting to gather momentum. Private equity and venture capital were once the preserve of the ultra wealthy. But I believe that it is the right time to shake up the market so that sophisticated investors can have direct access to this attractive asset class.

WHY INVEST ALONGSIDE VCS?

Like all early stage investing, venture capital is risky and there is the potential you could lose your entire investment (although HMRC’s generous Enterprise Investment Scheme goes a long way to reduce such risk). When successful exits are made, however, the rewards can be impressive – BVCA research indicates that, in 2014, the UK venture capital market delivered an annual return of 14.6 per cent. Institutional investors look to reduce the chance of failure.

For one, they generally don’t provide seed startup finance. They look for firms with market traction at the “sweet spot” of their growth. This minimises risk, as it is more likely that a company past proof of concept and with market demand will continue along a steady growth trajectory to provide a return. Fund managers also undertake detailed due diligence and provide ongoing support to their investments. They have the deep pockets needed to support firms as they grow and always have a view on exit strategy. This is vital for protecting an investment and maximising the company’s chance of success.

AN EVOLVING MARKET

Alternative finance is booming thanks to a convergence of technology, apathy towards the banking sector, and an enlightenment about the benefits of alternative forms of investment. Equity crowdfunding is a small sub segment, but is experiencing almost exponential growth. This looks set to continue for the foreseeable future, driven by a resurgence of entrepreneurship, greater public awareness, pension reform and the possible introduction of an alternative finance Isa. Equity crowdfunding is being taken outside of just the early adopters and moving firmly into the world of the more sophisticated investor.

However, to be taken seriously, platforms need to adapt to the market as it matures. Unlike loans, equity is a long-term game, and the success of platforms will lie in being able to demonstrate a track record for investors; despite all the hype, crowdfunding is currently a nascent industry with limited exits. VentureFounders is going beyond mainstream crowdfunding to seek out the best investment opportunities from the private equity and venture capital market. Our investors can stand shoulder to shoulder with leading UK investors from as little as £1,000.

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