Bure Valley Group is an investment brokerage business which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
Assessing the investment viability of a company which is not trading publicly isn’t usually easy. After all, large companies on a stock exchange are highly liquid and have a market value which is immediate and straightforward to access. A smaller, privately held company, however, will likely not have the same track record or financial statement information as these corporates – many of which may have operated for over 100 years.
Yet there can be enormous benefits to investing in a private company compared to a public one, even if the latter may seem superior in some ways. Many investors note that public companies are often focused on their quarterly results, sometimes to the detriment of long-term growth and value-creating opportunities for investors. A privately held company, however, arguably has much more freedom to invest in a product which might be years in the making, but which could create enormous growth in returns in the medium-term as they disrupt marketplaces.
Here, our investment team here at Bure Valley Group shares some insights from our network about how investors can successfully navigate the world of privately held companies for the benefit of their portfolios.
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The types of privately held companies
From the investor’s point of view, privately held companies can be divided into types depending on their stage in their lifecycle. At the very beginning, for instance, a private company may have simply gotten off the ground with the financial help of a family member or close friend. This is usually referred to as the angel investment stage, rendering the startup into an “angel firm”.
After this stage, venture capital usually arrives. Rather than one or two angel investors offering to get the business “off the ground”, here a group of investors come together to collectively present growth funding tied to managerial and/or operational assistance. Beyond this point, the mezzanine investment stage tends to come next. This is characterized by the concept of debt and equity, with the former converted into the latter should the business fail to meet its interest payments. After this, discussion normally turns to private equity investing, where funds might be used to perform mergers and acquisitions or buyouts of public companies.
Although each company comes with its own distinct risks and reward potential at each of these stages, the respective stages outlined above do each tend to come with their own risk level. As an example, angel investing tends to be regarded as higher-risk than venture capital, at which point a company has had more time to prove the viability of its business model.
Way of investing in privately held companies
Since the earliest stages of investing into privately held companies tend to carry the highest risk, it’s a good idea to consider joining an angel investor network. Here at Bure Valley Group, for instance, this allows our investors to access a list of pre-vetted privately held companies which are seeking early-stage funding. The resources and structures of such a network can also help streamline the whole investment process, and also potentially mitigate your risk by joining your capital with that of other investors. Outside of this kind of network, of course, you might want to consider venture capital trusts (VCTs) and similar funds to pool your capital with other investors, possibly in a more “passive” investment management style.
Important considerations to note
One crucial thing to bear in mind when investing in a privately held company is that such an investment requires a long-term commitment, due to the lack of liquidity in the early stages. As such, an investor network such as ours can help you identify appropriate “liquidity deadlines” in the future where you can expect to cash out (e.g. going public, buyout by a rival or buyout of private shareholders).
You will need to carefully value the company in question too before you make a commitment to it, and here an angel investor network can also be very useful. Your own level of wealth will also need to be taken into account, as those considering investments in privately held companies are usually regarded as wealthy or “Sophisticated Investors” who are able to handle the extra risk and illiquidity involved. Consider seeking independent financial advice if you are at all unsure about your own attitude towards investment risk, and whether the risks and rewards held out by privately held companies are right for you.
Investing in privately held companies offers some amazing investment growth opportunities which are hard to pass up. It’s just important that you consider your own goals, attitude to risk and investment horizon – as well as the individual company in question – before committing to it.
If you are a successful investor looking for EIS investment opportunities, or if you are a business owner looking for funding, then we’d love to hear from you. Get in touch today to start a conversation with our team, and discuss some of the great investment memorandums we have available:
+44 160 334 0827