• Finance source: Private entities, local community
• Funded project phase: Manufacturing & construction, use (for venture capital and equity finance; for impact investment, venture philanthropy and private equity)
• Security: Project assets
• Speed of accessing finance: Raising equity typically requires several months, and will usually involve external financial and legal advisers

Equity finance investment in the corporate sector (investment funds, venture capital, private equity, business angels, crowd funding) is important to allow firms to fund innovation and growth. For new companies, it is usually the most appropriate form of funding because equity investors will bear higher risks than debt investors and therefore require higher returns to compensate for the increased risk. Equity finance is key for economic development (BEIS, 2019). For local authorities, raising equity finance for projects can support the building of new assets and infrastructure.

Some advantages of using equity are:

✅ Less burden: With equity financing, there is no fixed repayment schedule, unlike a loan, which is particularly important in the early stages of a project when it may have no or very limited revenue. Equity investors will expect a return on their money but may be more flexible on timing and – since they are essentially paid to take higher risk – should be more prepared to accept fluctuations from the business plan than debt financiers would be. Ultimately, however, equity is a more expensive form of capital than debt.

✅ Lack of credit issues: If the local government lacks creditworthiness, raising equity for a project can be preferable or more suitable than debt financing.

✅ Learn and gain from partners: Equity can create new partnerships and connections.

On the other hand, equity financing also presents the following challenges:

❌ Equity capital is considerably more expensive than debt, since it bears higher risks.

❌ Share profit: Investors will expect to have a share of the profit, received through dividends, capital growth in the value of their shares or a mixture of both.

❌ Share control: Investors will typically expect some degree of control on the project, and the extent of this will usually depend on what percentage of the total equity they are providing. Even where they do not provide the bulk of the capital, they may require ‘negative control’, in other words the ability to prevent certain things from happening without their consent.

❌ Potential conflict: Sharing ownership and having to work with others could lead to tension and even conflict if there are differences in vision, management style and ways of running the business. Particularly where there is effectively a partnership between private and public sector entities, it is important to ensure at the outset of the project that the interests and philosophies of the partners are closely aligned.

Types of equity

Listed equity

This refers to shares that are listed on a public exchange (such as the London Stock Exchange or Alternative Investment Market). The listing of the shares provides much greater liquidity (it is easier for investors to buy and sell the shares on the open market) and greater disclosure (the issuer company must comply with many rules intended to provide transparency of information, so that all investors are made aware of material information – information that may affect the share price – at the same time). The greater regulation means more restrictions on the issuer, and greater cost, so listing is mainly used by large companies with a broad investor base. Investors in public markets include institutional investors (pension funds and insurance companies, for instance), investment funds and private (retail) investors.

Private equity

Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies or engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilised to fund new technology, make acquisitions, expand working capital and bolster and solidify a balance sheet. In most cases, the investors operate via a private equity fund, with one fund manager coordinating the investment and allowing investors to spread their money across a range of funds to diversify risk.

Private equity investors are typically much more active investors than those investing in listed equities, and they will often require direct involvement in the management of the company to ensure that targets are met and strategy is executed in line with the business plan.

Venture capital

Venture capital (VC) is a form of private equity and a type of financing that investors provide to a company that is believed to have long-term growth potential. VC funding is prepared to accept higher risks and is often seen investing in early-stage, high-tech companies. The risk of failure of companies at this stage is significant, so VC investors expect high returns from their investments – and, again, may typically be closely involved in the running of the business.

In some cases investors may not be focused on profits but rather on making investments for social good, which is known as venture philanthropy. This is a form of impact investment, meaning the aim is to generate positive social or environmental effects while investing for financial gain (note this can be accomplished through debt or fixed-income securities as well as private equity).

Direct/strategic investment

This is another approach to unlisted equity. One or more large investors (very often industrial companies with relevant experience in the sector) make a direct, and sizeable, investment into an infrastructure project. The equity is not listed, and therefore is technically a form of private equity.

However, in this case, the investor may be an energy company or construction company, taking a strategic stake in a significant project. This has been seen extensively in the offshore wind power sector, with large domestic and foreign companies holding large, and sometimes majority, stakes in the projects. The strategic interest of the company to hold the asset for a long period can coincide well with the long-term, stable nature of such infrastructure projects.

Business angels

A ‘business angel’ is a private individual, often with a high net worth and usually with business experience, who directly invests part of their wealth in new and growing private businesses. Business angels can invest individually or as part of a syndicate where one angel typically takes the lead role.

Besides capital, angel investors provide business management experience, skills and contacts for the entrepreneur. Experienced angels also know that they may have to wait for a return on their investment. They can, therefore, be a good source of ‘smart and patient’ capital.

Business angels play an important role in the economy. In many countries, they constitute the second-largest source of external funding in newly established ventures, after family and friends. They are increasingly important as providers of risk capital and contributors to economic growth and technological advances (European Commission, 2021a).

Crowdfunding

Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people via online platforms.

Crowdfunding is most often used by startup companies or growing businesses as a way of accessing alternative funds. It is an innovative way of sourcing funding for new projects, businesses or ideas.

It can also be a way of cultivating a community around the business offering. By using the power of the online community, the fundraiser can also gain useful market insights and access to new customers (European Commission, 2021b

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