Here's our theory. Private equity, as we have come to know it, is over. The game is well and truly up for a business model that saw some cute financial engineering, based on paying down the debt on a highly leveraged deal.
In a time of abundant cash it almost made sense. In a credit crunch it is dead.
So what now for the golden generation who made great returns, great bonuses and great fortunes for business owners around the regions of England? They still have funds that are well stocked with capital, and they still have the skills to spot a business that can lift off with a sprinkle of their stardust. They just don’t have the debt to pile on to an investee company.
So here’s the test for a region in recession. Private equity now has an even bigger role to play, but it doesn’t just need a new name and subtle gear shift in the business model, it requires a huge leap in ambition.
We’ve called it Venture Capital 2.0. Venture capital was the making of the technology revolution of Silicon Valley. It was part of a burst of energy that didn’t just come about through a series of unforeseen coincidences, or as a result of that happy collision between ideas and finance. It also rose out of the ashes of a recession, with collaborations from universities and major corporations that had forgotten how to innovate.
Northern entrepreneurs have come up with imaginative investment vehicles such as the Endless turnaround fund and the Rapid Realisations Fund. Simon Orange is showing daring with CorpAcq, a growing and thriving business grouping (p6). Andrew Duckworth has launched Eternitas, aimed at relieving distressed assets, while toilet roll tycoons Alan Murphy and Steve Sealey have backed businesses through the North West Seed Fund and Aquarius Private Equity.
But the government could also help massively by changing the rules on Venture Capital Trusts and raising the limit from £2m per investment, as well as opening up opportunities to invest VCT funds in businesses from the crazy low limit of a business with 50 employees or less and gross assets of £8m.
Unrelated, but closely linked, is the move by the Northwest Regional Development Agency to move quickly towards developing a Venture Capital Loan Fund. This must not be a missed opportunity. There are lessons to be learned from previous government-funded venture capital funds that tried to be instruments of social policy, or tied the funds down with the strings they attached to investment. The North West Equity Fund was a missed opportunity because it was too restricted, while the Merseyside Special Investment Fund took a while to get its pitch and purpose just right.
We regard ourselves as a critical friend of the NWDA. We wish their endeavours well. But there are risks attached to something like this. There will be mistakes made in investment decisions, some ideas won’t work, but that’s capitalism, folks. And holding your nerve is vitally important, however tempting the urge to meddle.
Michael Taylor, editor
Also in: March 2009
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New age equity
The launch of a new venture capital fund in the North West could not have come at a better time. Rupert Cornford reports on why the next piece of news from the RDA will be important for a changing industry.
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Cash is king
Julian Urry is a man in a hurry. Twenty store openings are pencilled in for 2009 as Cash Generator goes from strength to strength. Neil Tague met him.