Private equity and venture capital models converging, says lawyer

The economic downturn has had a dramatic impact on the private equity and venture capital industries, with both needing to re-align their priorities in order to survive, according to European law firm Taylor Wessing.

It says the emerging trend of competition between both to invest in late-stage deals has therefore led to something of a convergence in their business models.

Simon Walker, UK head of venture capital at Taylor Wessing (pictured), says: ‘The financial crisis has heralded significant changes in investment strategies, meaning that private equity and venture capital funds are often now in direct competition with each other. Historically, venture capital funds have looked to invest in early-stage or start-up companies, mostly in the technology and life sciences sectors, in the hope that their investment would grow rapidly. By contrast, private equity investment, more reliant on the availability of debt, has traditionally focused on mature companies – those with a solid trading history, regular cash flows and sufficient assets to persuade a bank to lend.

‘However, the venture capital community is now moving towards late-stage deals as mature businesses are  perceived to be much less of a risk, even though a greater capital investment may be required. On the other hand, barriers that had previously inhibited private equity houses from investing in the tech sector are reducing, as the number of technology companies with significant revenue streams increases. Indeed, technology investment is now almost thought of as a defensive play compared to very high risk financial institutions.

‘VC and PE business models are therefore converging, which is likely to give rise to a range of new issues. Both industries will need to get comfortable with different transaction structures, management incentives and levels of control as they learn to compete with each other in a much more crowded market.’