Learn the lingo to avoid the Dingo

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The Independent Online
AT A TIME when there seems to be no limit to the excitement surrounding hi-tech start-ups, there is an irresistible glamour attached to venture capital and private equity finance. Traditional bankers might have the image of dull bureaucrats who frown upon entrepreneurs and prefer to back only surefire winners. In the public imagination - stoked by stories of countless Silicon Valley successes - venture capitalists, or "VCs", as they are called, are as heroic as their military namesakes.

In real life, things are not as black and white. There is still a well- known funding gap that often prevents companies at the low end of the scale gaining access to the cash they need, despite the plethora of VCs. And many of the companies that do get private equity finance are not exactly entrepreneurial.

As Peter Temple points out in his new Private Equity (John Wiley and Sons), it is misleading to think of this area of finance as a single activity. It ranges from individuals putting in a few thousand pounds to support a scientist's dream, to full-scale City deals worth hundreds of millions.

Such has been the level of activity at the top end, it is widely felt that large international private equity investors have, with their disparate holdings, emerged to take the place of the old corporate conglomerates built up by the likes of Lord Hanson and Sir Owen Green of BTR. For example, the US firm Texas Pacific Group has been active in Europe, acquiring interests as diverse asairlines and the motorcycle-maker Ducati. In the UK, players such as Cinven have invested in companies as widely different as Routledge Publishing and Dunlop-Slazenger.

This is not to say that such activity has been all about trophy hunting. Mr Temple writes: "It is no exaggeration to say that the private equity revolution has played a key role in the dismantling and re-assembling of Britain's industrial base in the course of the Eighties and in the creation of the UK's new service-orientated economy."

But there is a good deal of evidence to suggest private equity has been more concerned with sorting out mature businesses than with nurturing the genuinely new.

The UK has never had the same emphasis on large-scale buyouts as the US, where the highly leveraged buyout by Kohlberg Krabis & Roberts of RJR Nabisco in 1988 was just an extreme example of an Eighties trend. But the first half of last year saw the value of large-scale management buyouts in Britain double to nearly pounds 7m. Mr Temple cites two main reasons. First, there was an increasing number of business disposals from companies wishing to focus their operations. Second, privatisation has driven many buyouts, particularly in industry where a conventional public flotation would have been difficult. This was the case with the sale of parts of British Rail near the end of the last Conservative government, when there was a high degree of political uncertainty. The buyouts of the three rolling stock leasing companies - Angel Trains, Porterbrook and Eversholt - allowed, as Mr Temple says: "Those private equity firms smart enough to spot the value, with the opportunity to buy assets on the cheap and sell them off at a substantial geared-up profit only a matter of months later." Among the "bad" deals, Mr Temple lists the debt-laden acquisition by Lowndes Queensway of the carpet business set up by Lord Harris in 1988 and the management buyout of the home product company Magnet.

There are many shades of good and bad. Mr Temple suggests how a few can be described. There is the Bingo (buyin growth opportunity) that can become a Dingo (dud investment - no growth opportunity), while a Bimbo (buyin management buyout) can transmute into a Bambi (bloody awful management buyin), which may - like the Colombo (collossally overpriced management buyout) - require a Rambo (rescue after management buyout).

This is the terminology businesses of all sorts had better get used to. With the US firm increasingly active on this side of the Atlantic and domestic operations growing in their wake, private equity finance has plenty of life in it yet.