Five things you need to know about investing in unlisted companies

17 April 2012

Most investors want to be able to sell their holdings easily if necessary and therefore buy shares traded through the London Stock Exchange; those looking for higher potential gains (and willing to stomach higher risk) may turn to smaller companies listed on the Alternative Investment Market (AIM).

But what if you want to invest in companies whose shares are not available on the open market?

1. Why invest in unlisted companies?

Small companies with ambitions for high, rapid growth need financial input to take the business to the next level. Funding for such high-risk enterprises is not necessarily easy to come by, and that's where private equity comes in.

It consists of investors and funds that invest directly into unquoted firms, and is seen as being for wealthier, more sophisticated investors because of its risky nature and the difficulty of getting money out.

But the right investment can yield spectacular returns.

2. What are the routes in?

It depends what you want. There are various forms of collective investment that focus on different parts of the private equity market, including private equity investment trusts and tax-efficient venture capital trusts (VCTs). But you can't pick and choose your own investments.

If you're looking to put cash into a particular unquoted company, you may be able to use the share-matching facility offered by the likes of JP Jenkins or the regular share auctions run by Sharemark. But you can only trade the relatively few member companies on offer, and they tend to be larger private companies.

You may also be able to buy shares in an initial public offering (IPO or new issue) – the first sale of shares in a company. A stockbroker should be able to keep you posted about forthcoming IPOs.

3. How do I invest in very small firms?

For start-ups and very young companies, you could consider becoming a business angel. These are private investors or syndicates of investors who plough not only funds but also in many cases their own expertise, contacts and management support into the chosen enterprise, often taking a seat on the board.

There are around 18,000 angel investors across the UK, investing around £800 million annually, according to the British Business Angels Association (BBAA).

Shares in companies that qualify for the enterprise investment scheme (EIS) – for example, by having assets of less than £15 million and less than 250 employees – can be bought as single-company EISs, in which case they qualify for generous tax breaks.

EIS funds are also available as a way of spreading risk across several such businesses. In addition, new 'seed' EISs launched on 6 April that channel funds into tiny firms less than two years old and with less than 25 employees.

4. How much money will I need to invest?

Again, it depends which route you want to take. Business angels, for instance, may invest anything between £10,000 and £750,000 in a business, though most put in less than £100,000.

The bottom line is that these are risky, uncertain investments and it's not easy to get your money out at short notice (you could also lose EIS and VCT tax reliefs if you did so within the qualifying period – three years for EISs and five years for VCTs).

In general they are only suitable for highnet- worth investors with other sources of wealth.

However, it is occasionally possible to invest small amounts via share-matching schemes or IPOs. The recent IPO by Scottish brewery BrewDog attracted almost 6,000 investors and raised £2.2 million to build a new brewery.

The minimum spend was £95 for four shares, with investors spending an average of £372; they will be able to trade their shares in 2013.

5. Where can I find out more?

Execution-only broker has a lot of information about current VCT and EIS issues. The BBAA website,, is a good place to start if you fancy becoming an angel. Venture capital in general is well explained on the British Venture Capital Association website,

For trading unlisted shares, have a look at, which offers shares in such worthy ventures as Dyson Group and Sheffield United Football Club.

This article was written for our sister publication Money Observer


Add new comment