With the General Election now over and a new Labour government formed, could this signal a fresh wave of investment into UK based private limited companies?
During the election campaign, Labour outlined that it would be looking for significant global private sector investment. This was reiterated following the election result by new Chancellor of the Exchequer, Rachel Reeves, who confirmed that Labour is pressing ahead with plans for a new "national wealth fund" designed to attract investors back to the UK.
With equity investment seemingly a key topic on Labour's agenda, let's take a closer look at what private sector equity investment is in the UK and why an investor might choose it over investing in a public company.
What is equity investment in private limited companies?
Equity investment in private limited companies involves an investor acquiring a minority stake (usually between 5% – 25%) in a privately run company in exchange for investing their own money in that company. It tends to offer an investor a promising means of financial returns whilst having the opportunity of being actively involved in a company's operations and strategic development. These investors are sometimes called "angel investors".
This differs somewhat to publicly owned companies (PLCs). PLCs are much larger companies where ownership can be widespread as shares are offered to the public on a stock market (such as the London Stock Exchange). However, there is less opportunity for an investor to protect their investment and play an active role in that company. This is one of several reasons why investing in a private limited company may be more appealing to private/angel investors.
Other reasons to invest in private companies?
There are other reasons why investors choose to invest in private limited companies (as opposed to PLCs). The key ones are:
- Growth: many current start-ups and small to medium-sized businesses (SMEs) usually operate in innovative and emerging sectors (such as software, technology and financial services). There is often high growth and expansion potential with these types of companies (especially if invested in during the early stages of development);
- Tax treatment: currently, the UK offers favourable tax incentives to investments made in start-up companies/SMEs. It is of course important that any investor takes specific tax advice from a specialist accountant before investing (and we anticipate that the new government will be scrutinising these schemes and tax incentives in the coming months);
- Diversification: investing in start-ups and SMEs affords an investor the opportunity to diversify their portfolios. This reduces overall risk by spreading investments across different market sectors (as these types of businesses are generally less vulnerable to market volatility which PLCs can experience);
- Influence: as mentioned above, investing in start-ups and SMEs affords an investor the opportunity to control and shape the direction of the business and take a more "hands-on" approach to push the business forward. This is not possible with a small stake in a PLC. It is however very important that an investor's position is suitably protected in a Shareholders Agreement and/or in the company's Articles of Association.
Before investing in a company, it is vital that an investor carries out thorough legal and financial due diligence on the company to better understand any potential risks and pitfalls.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.