Private equity refers to a purchase or sale of company shares to a private investor, meaning that such investments are only carried out between individuals or companies. In contrast, public equity refers to company shares that are traded on public stock markets.
Private equity is a very effective way to raise capital for a company. The benefit to the business is that they receive an interest free lump sum that is used to help grow the business, while the investor has the potential to make a healthy profit.
By selling shares in a company, an entrepreneur is not exposed to the risk of rising interest rates or failing to repay a loan to a bank. Although they do have to sacrifice a part of their business, usually the investor can bring skills, knowledge and business contacts and will actively help the business grow.
Investing in other companies
The second way that private equity can benefit a company is through investments. When a business becomes successful it will often build up a cash fund, and if there is no immediate requirement to reinvest a cash surplus into the business it may be wise to build up some corporate investments.
Often an entrepreneur will gain some insights into niche investment areas, especially when this involves companies with which they routinely do business.
Some companies wholly purchase other businesses; for example AnaCap, a European private equity firm, wholly acquired Brightside Group in 2014 to bolster its private equity portfolio.
Private equity provides many benefits for businesses, and there are some clear advantages of using private equity that extend beyond the benefit of an interest free cash injection.
The private equity industry has undergone many changes in recent years, and the most successful private equity investors are those that aim to create value. Businesses are no longer interested in simply partnering with a passive investor who will take a share in the business without providing a meaningful input into the future operations of the company.
Today, private equity is as much about giving a company skills, experience and access to influential business partners as simply exchanging some cash for a share certificate.
This new trend in private equity has been termed intellectual capital – a company is literally purchasing the intellect of a successful business leader who will be able to help steer the business in the right direction.
According to Trey Vincent, writing for Real Business, private equity backed companies are more likely to succeed and grow at a faster rate than their competitors. This is due to several key factors.
Private equity investors can bring operating expertise to a business; years of enhancing operating procedures teach business leaders how to operate a large business most efficiently. This skill can rarely be taught, and entrepreneurs can be steered clear from the classic mistakes that new business managers make.
Private investors are often already operating overseas, so they can help with the international expansion of a business. In the current market this is vital for future growth and success.
Many private investors will partner with companies that support their portfolio, and this can mean an entrepreneur will be introduced to suppliers and other business-to-business providers with whom they can strike excellent deals.
In some ways partnering with a top investment manager is like joining an exclusive and successful business club where everybody is happy to work together.