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HMRC internal manual

International Manual

HM Revenue & Customs
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Thin capitalisation: practical guidance: private equity: what is private equity?

There is no universally accepted definition of the term private equity and there is often confusion between the terms “private equity” and “venture capital”, as the two are used differently by different people. In this manual, we use the terms as follows:

  • Venture capital describes an equity investment in a business at the start up and early development stages. See also INTM519030.
  • Private equity refers to management buyouts, buy-ins and similar investment structures whereby the private equity house takes an equity stake in a more established business.

A private equity house will raise an investment fund from sources outside the public markets such pension funds, funds of funds and wealthy individuals. The target company may be any size from the buyout of a business with value of a few million pounds to the taking back into private ownership of a previously publicly-quoted company. The most commonly encountered acquisition structure is the management buyout of a business. There is more detail on this at INTM519020.

Private equity funds differ in strategy, structure and objective from other investment funds. They will have a clear investment strategy and will often exert strict control over the businesses they invest in. Typically, investments are held for three to five years, the aim being to increase the value significantly before the business is sold or floated on a stock exchange through a share offering.

Thin capitalisation and private equity

Much of the general thin cap guidance covered in the other chapters of this part of the International Manual, such as the ATCA procedure and working the case is also relevant in a private equity context. However, there are features particular to private equity cases which affect how the case is approached. For instance, a private equity buyout is usually financed in part by loans from a third-party lender and is often highly leveraged. This raises the issue of whether further debt, provided by connected parties, would have been provided at arm’s length, and if so, how much. There is more detail on this in INTM519050.