Private investment funds: what is it?

Private investment funds are often set up in the form of finance companies, in which several individuals and/or legal entities put money together to form a fund that is large enough to invest in projects that one of the directors would not be able to undertake alone. The second purpose of these finance companies is to enable the directors, who quite regularly have different profiles, to spread the investment risk.

Very often, the people who set up these funds decide on the targets (companies) in which the fund can invest. For example, the founders may decide to invest only in technology companies with at least 3 years' experience and sales of at least €5 million. They will also decide on the minimum and maximum amounts of their investments.

Investment funds must be authorised by the FSMA (Financial Services and Markets Authority) in order to operate.

Funds come into play in different ways and in different forms. They can provide liquidity for a company's development, but they can also provide cash flow, i.e. help a company to survive. They can also finance venture capital to help a start-up company get off the ground. Some even intervene before that in the research and development phase.

They may also be involved in an LBO (Leveraged Buyout), i.e. to finance the purchase of a company. In this case, the Funds regularly provide a subordinated bank loan. They can even intervene in a company in difficulty, including during a JRP (Judicial Reorganisation Procedure).

Repayment terms also vary according to the type of loan, but rarely exceed 7 years. Loan formulas are varied, and can take the form of equity investments, convertible loans or simple loans with widely varying interest rates.

Some Funds only intervene if the financial company lending the funds has its directors on the Board of Directors of the applicant company. In fact, we consider this to be an added value of the loan, even if the directors are very often paid for their services.

Advantages

Their acquisition can be decided very quickly. The Fund's financing company will make its expertise and network available to the company. Repayment terms can be adapted fairly easily if the company runs into difficulties along the way. No personal guarantee is required.

Disadvantages

Loan rates are high and the company boss is no longer completely free to do what he wants in his company without referring to his new board of directors.

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