Picking Business Winners:

We all aspire to backing winners, whether in sport or business. If you backed Apple or Amazon in the early days, you would be looking at lottery style returns. So, it is no wonder we are attracted to the dream of backing the next big thing! There are many ways to access the world of private business investments depending on your wealth and your risk appetite.

But in a world where more and more people are seeking the quickest route to financial security, diving into the world of investments can be a scary proposition. If you get it right, you’ll be sitting pretty, but one or two wrong turns can quickly see you spinning into a tale of despair.

Here, we explore the wild world of picking business winners.

Private Equity (PE)

At the top end of food chain is the world of private equity. Access is usually restricted to the very few with investment tickets starting at upwards of £1 million for the best performing funds with a promise of three to four times your money in 5–10 years. Private equity focusses on developing and investing in well established businesses and helping them to scale new heights. This is typically the less risky end of the market but here are some key ingredients that make private equity so successful:

• In depth due diligence—curating investments takes time and the filtering is rigorous, with the research leaving no stone unturned. The costs of this due diligence will also be borne by the Company on completion.

• Active management—private equity funds are active investors and will require both board representation with control and voting rights to enable them to veto decisions made by the management team if necessary. PE houses will also play an active role in driving business growth through acquisitions and international expansion, with rights over strategy and approval on deals.

• Legal structuring—private equity funds layer in debt, interest, and equity in every deal to ensure investors are completely protected and that the investment is paid back before any other shareholders see a return.

• Portfolio balance—in order to not have specific sector exposure, investors in private equity are spread across a wide portfolio

Venture Capital

Venture capital is very similar to private equity but is focussed on earlier stage businesses and start-ups. Access is restricted with investment tickets starting around £100,000, making it more difficult for people to jump into. This channel comes with a lot more risk but the returns are potentially much higher as it targets a return of 10 times your initial investment in 5-10 years.

The ingredients to successful venture capital project are very similar to private equity too, with active investment being the key driver. This sector comes with many failures that are compensated with some outstanding wins. The most volatile aspect of venture capital comes with funds that have been focussed on start-ups, with usually require balancing with tax optimising features for investors.

Crowdfunding

The high-risk end of the market is usually focussed around start-ups, where access is unrestricted and failure very common. A less rigorous selection process and vanilla equity, which usually requires only a simple subscription agreement, means active investment is very rare. Unless you back a selection of businesses, portfolio diversity does not exist.

If you have been fortunate enough to have picked a winner, be aware of special share classes and others receiving payment ahead of you. While crowdfunding platforms which set out with sparkly start-ups that promise to be the next big thing might be the most accessible area to seek out winners, but often they are the riskiest too.

Finding the balance is key. How can you enter the murky waters of private equity and venture capital without restrictive financial criteria to access a blend of businesses with outstanding potential and generate 10-20 times your investment over a 5-10 year period?

Corporate finance advisor Dominic Berger, recommends checking out businesses like the Angel Business Club, Europe's largest community of business angels who offer human and financial capital to facilitate accelerated growth and return on investment. The club uses membership fees to curate businesses with outstanding potential and follows a stringent process of business selection, focusing on proven businesses with three clear and distinct frontiers—market entry and protection, innovation and growth, and total industry disruption.

He said: “The Angel Business Club look for big ideas committed to creating long-term and sustainable value. The three frontiers are a reflection of what they believe to be the key stages in a successful company’s development cycle.

“The Club also protects members with private equity style investment agreements. It actively drives business growth with board seats and expertise and provides its members with free shares in a broad and well-balanced portfolio of companies.”

Picking business winners in a crowded market is always going to come with some risk so make sure to do your research before diving in headfirst. It will make your pay day bigger in the long run!