How Does the Professional Venture Capital ("VC")  and Private Equity ("PE") Industry Work?

New Zealand's professional venture capital and private equity managers had funds under management or committed of approximately $NZ 1.2 billion at June 2003.

New Zealand's VC and PE firms typically source most of their funding from high net worth individuals, corporates and large investment institutions such as superannuation funds and banks. These institutions invest in a VC or PE fund for a period of up to ten years.

To compensate for the long-term commitment and lack of security and liquidity, investors expect to receive very high returns on their investment. Therefore, venture capitalists invest in companies with high growth potential or in companies which have the ability to quickly repay a high level of debt - as in the case of a leveraged management buyout.

Venture capitalists typically exit the investment through the company listing on the stock exchange, selling to a trade buyer or through a management buyout. Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gain when they eventually sell their shares in the company, typically three to seven years after the investment.

Venture capitalists are therefore in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors' capital.