An exploration of tools of analysis commonly used by private equity in making investment decision

2.1 THE CONCEPT OF PRIVATE EQUITY

The roots of «private equity», with regard to the attention the academic community paid to that term at least, can be stretched far back into the 80s as argued by Wright and Robbie (1998). In any case, the notion of «private equity» has recently been devised in a broad sense as «[involving] investment in unquoted companies, [and it includes] both early stage venture capital, and later stage buyouts» (Wood and Wright, 2009, p. 361).

This conception of the term «Private equity» echoes that of Brealey, Myers and Allen (2008). Indeed, according to these authors the notion of private equity could be defined as «equity that is not publicly traded and that is used to finance business start-ups, leveraged buyouts, etc.» (Brealey, Myers and Allen, 2008, p. G-10).

Clearly, from the above definitions there is a convergence on the broad understanding of «private equity» because of its features, namely money invested in venture and not listed companies. Moreover, this conception has been adopted in practice. In fact, the British Venture Capital Association (2010) states «the term private equity is generally used in Europe to cover the industry as a whole, including both buyouts and venture capital» (BVCA, 2010, p. 14). However, the BVCA itself carries on drawing the difference between private equity and Venture capital. The former «describes equity investments in unquoted companies, often accompanied by the provision of loans and other capital bearing an equity-type risk». The latter, however, constitutes a «subcategory covering the start-up to expansion stages of investment» (BVCA, 2010, p. 14).

With regard to the concept of start-up, Arnold (2004) suggested a definition in 2004. In his opinion, a start-up company or «startup» is a company with a limited or non-existing operating history (Arnold, 2004, p. 388). These companies, generally newly created, are in a phase of development and research for markets. The term became popular internationally during the dot-com bubble covering roughly 1995-2000 when numerous dot-com organisations were created ( http://en.wikipedia.org/wiki/Dot-com_bubble).

At any rate, throughout this paper private equity will be perceived in a broad sense. This is due to the fact that the focus here are the techniques used to carry out investment appraisal for start up companies. The term «private equity», under this consideration, will therefore allude to «venture capital». We should now turn to scrutinise how the scientific writings consider the concept of «investment decision»

2.2 THE NOTION OF INVESTMENT DECISION

To start with, it should be appropriate to comprehend the concept of investment decision by examining the scientific writings on «investment» and «investment decision» successively.

2.2.1 Investment

Generally speaking, «investment» means the use of money in the hope of making more money. (www.encarta.msn.com/encnet/dictionary/dictionaryhome.aspx).

More specifically in finance, the concept of INVESTMENT refers to the purchase of a financial product or other item of value with an expectation of favourable future returns. ( http://www.investorwords.com/2599/investment.html#ixzz1KcRjbPHc).

Two authors, Arnold (2008) and Chandra (2008), further develop this conception of the term «investment». According to the former (2008), «investment involves resources being laid aside to produce a return in the future, for instance, today's consumption is reduced in order to put resources into building a factory and the creation of machine tools to produce goods in later years.» (Arnold, 2008, p. 20). In addition, the latter (2008) conceives investment as «a sacrifice of current money or other resources for future benefits.» (Chandra, 2008, p. 3). What about investment decision especially?