Introduction to Private Equity: Venture, Growth, LBO and Turn-Around Capital, 2nd Edition

Part I

What is Private Equity?

Whenever a company needs financing, two solutions come to mind: the stock exchange and bank loans. The stock exchange is a limited solution. It provides only access to funding for medium- and large-sized companies that meet specific criteria (sales figures, total of balance sheet, minimum number of years of existence, etc.).

The conditions for taking out a loan are also strictly defined. Companies must prove their ability to pay back the bank in fixed instalments, which means that they must show a certain term of existence, stability of cash flows, healthy activity and also a limited existing indebtedness. They also have to provide some guarantees to banks, as collateral for the loan (i.e., if the loan is not paid, the bank will seize the guarantee, sell it and hence get paid back thanks to it).

Bank loans are actually being reshaped. This movement started with the switch in the US from an economy essentially supported by banks to an economy supported by financial markets.1 It has slowly permeated other countries. Today,2 banks seem on the verge of retreating further from certain financing operations, such as lending to small and medium-sized businesses. This movement is undertaken by banks under the pressure of new regulations (such as the Basel III Agreements), and as a consequence of the last financial crisis. This will pave the way for the rise of ‘non-bank finance companies’.

If neither the stock exchange nor banks finance business creation ...