Private Equity Flashcards
Private equity - characteristics
Provides medium to long term finance in return for equity stake
Private equity firm looks to make gain from investment through company success and an exit plan which could be:
- selling shares back to management
- selling shares to another investor
- a trade sale
- the company being listed on stock exchange
Methods of investing in private equity
Private equity funds
Listed private equity investment companies
VCTs
EISs
SEISs
Business Angels
Shares Traded on AIM
Enterprise Zone Schemes
What are private equity funds?
Many structured as limited partnerships
Usually fixed life of 10 years
What are listed private equity companies and the risks?
Pooled, closed ended investment (form of investment trust)
Invest directly in unlisted companies / invest in funds that invest in unlisted companies (fund of fund)
Risks
- Limited diversification benefits
- Vulnerable to domestic downturn (if one product firm)
- Often highly geared
- More appropriate for wealthier investors
- Potential liquidity issues
What are VCTs and what are the tax characteristics?
Listed company run by fund managers
Investment made by subscribing for new shares when trust launched or buying shares once trust established
Investors can spread risk over number of unlisted companies
30% income tax relief on investments up to £200,000
Relief withdrawn if held less than 5 years
Dividends exempt from income tax
No CGT deferral available
No CGT on disposal
Losses not allowable for CGT purposes
What are the main qualifying conditions for VCTs?
Listed on stock exchange
Income wholly/mainly derived from shares or securities
At least 80% of investments in qualifying holdings
No more than 15% of total investments in single company
Fewer than 250 full time employees (500 for knowledge intensive companies)
At least 70% of qualifying holdings to be in new ordinary shares with no preferential rights
Investments linked to a share buy-back, or made within 6 months of disposal of shares in the same VCT are excluded from new tax relief
What is an EIS and what are the tax characteristics?
Intended to help small, higher risk unquoted companies raise capital by providing tax relief for investors
30% income tax relief on investments up to £1m (or £2m for knowledge intensive companies)
Income tax relief given in year of assessment when shares are issued
Relief withdrawn if shares disposed of within 3 years except to a spouse and not on investor’s death
Able to carry back relief
Able to defer CGT gain by re-investing into EIS
If shares held for 2 years, qualify for 100% business relief
What are the main tax relief conditions for EIS?
Qualifying individuals subscribing for qualifying shares in qualifying company
Qualifying individual is someone not connected with company when subscribing
Eligible shares are new ordinary shares not redeemable for at least 3 years
Qualifying company must be unlisted when shares issued
Fewer than 250 full time employees (500 for knowledge intensive)
Gross assets below £15m before issue of shares and £16m after
The company must have raised no more than £5m in the previous 12 months
What is a SEIS and what are the tax characteristics?
Focuses on smaller early-stage companies carrying out a qualifying trade
Income tax relief 50% up to £200,000
CGT exemption on 50% of gains invested in SEIS shares
Can carry back CGT and income tax relief
100% business relief after 2 years
Main SEIS conditions?
Be unquoted at the time of issue of the shares
Employ 25 people or less
No more than 2 years old
Less than £200,000 in gross assets
Companies benefitting from subsidies from the generation of renewable energy cannot also benefit from SEISs
