Private Equity 101: Understanding the Basics and How it Can Help Your Business

As you begin to establish your business, you will need to secure funding from investors who believe in the product or service you offer. There are many different ways to secure funding, but one of the more common for companies who are privately traded is to turn towards private equity. Learn everything there is to know about private equity and the benefits it can bring to your business. 

Private vs. Public Equity: What’s the Difference?

Between the two, far more people are aware of public equity as opposed to private equity. When a company is traded on the stock market, anybody with a trading account can purchase shares of a company. Underwriters set the price of these shares at an initial public offering (IPO). If a company wishes to raise more capital in the future, they have the option of issuing additional stock. 

On the other hand, private equity refers to a company that is not publicly traded on the stock market. Private investors still purchase shares of a company, but those shares are private, rather than public. Instead of being compensated based on the number of shares they own, private investors are typically compensated through distributions the company gives. 

In most cases, private equity investors are referred to as accredited investors. As opposed to when dealing with public equity, accredited investors in private equity can be an individual as well as large organizations such as a bank. Most companies start out private and get involved with private equity before eventually transitioning public. 

What is a Private Equity Firm?

Private equity firms are responsible for gathering funds from accredited investors and pooling them into private equity funds. The private equity firm then manages the investments that these funds partake in return for fees and a share of profits. Private equity firms often specialize in a certain form of private equity, such as healthcare private equity, technological private equity, and more. 

Two Common Private Equity Investment Strategies

One unique difference between private equity and other financing strategies for companies is that private equity firms typically only invest in more mature companies. However, there are two general strategies private equity firms use when investing funds:

1. Leveraged Buyouts

A leveraged buyout occurs when a private equity firm uses the funds from investors to purchase the majority control amount of an existing company. Generally, the purpose of a leveraged buyout is to make a public company private or to gain control over the direction of a company. 

2. Venture Capital

The second strategy private equity firms follow is more closely related to venture capital. As opposed to investing funds into a more mature organization, venture capital refers to investing funds into startup companies that need funding to get off the ground. This is a riskier form of private equity as there is very little guarantee that a company will see success. 

Crucial Benefits Private Equity Firms Offer to a Business

There are a number of different benefits associated with partnering with a private equity firm, but the most prominent five benefits include:

1. Cash Infusion

With buyout funds amounting to $957 billion in global assets within recent years, it’s clear that private equity provides a large amount of capital. This is the primary reason many private organizations choose to partner with private equity firms. By having an injection of cash into the business, a company can fund product development, marketing, costs associated with producing their goods, and so much more. 

2. Expertise

For companies who are just starting out and don’t have much experience, private equity firms offer a large amount of expertise. With most private equity firm members having worked with many companies in the past, for better or worse, they have seen what works and what doesn’t work. Tapping into this expertise while working with a private equity firm is one of the best benefits associated with private equity. 

3. Returns that are Proven

Naturally, returns are never guaranteed, but many private equity firms have a proven track record when it comes to having success. Long-term average returns for private equity firms are well over 15%, which is higher than average long-term venture capital returns. This level of return can vary depending on the type of private equity that is being handled. While venture capital investing is riskier, private equity investing in more mature companies tends to have a stronger long-term outlook. 

4. A Commitment to Success

One of the biggest benefits of securing financing with private equity as opposed to a loan from a bank is that private equity firms are committed to your success. After all, their own profit depends on your company seeing success and becoming a return on investment for them. To that end, private equity firms have a larger interest in seeing you succeed than other organizations such as banks who may only offer you a revolving line of credit. 

5. Quick and Efficient Scaling

Finally, one of the most important benefits of private equity is the ability to quickly and efficiently scale your business. If you have used all of the funds you were initially provided with through private investment, but have demonstrated success, a private equity firm can likely get your organization another sum of money quickly. For companies that operate in industries with explosive growth potential, this can be the difference that sets you apart from the competition. Keeping up with demand is a challenge if you don’t have the capital to increase production capacity, advertising, and other factors. 

Grow your Business Today

Growing a business is no easy task. Unless you have a large amount of capital straight off the bat, you will need to turn towards financing. While loans can be beneficial, private equity can offer helpful benefits that you may not get elsewhere. Consider partnering with a private equity firm who can provide you with capital to grow your business.