Private equity firms are investment vehicles. Their mission is to invest in companies (with a majority or minority stake), create value during a period of approximately four or five years and then, sell their share with the greatest capital gain possible.
Private equity makes mid to long term investments of money in companies (a maximum of ten years) usually investing in the capital of private companies to help them grow and be successful. The return for the risk taken is normally in the form of capital.
Unlike banks, which lend money regardless of your company’s financial situation in order for it to be returned with interest on set dates, private equity invests in your company in exchange for owning a piece of it. After a private equity investment, you will have a smaller piece of the cake, but your piece could end up being worth a lot more than what you had before the investment.
Once invested, the private equity’s profits will depend on the growth and profitability of your company. If you win, they win. If you fail, they fail. Private equity firms usually bring added value to your company, providing credibility in the face of third parties and offering you their management experience.
Private equity wants to increase your company’s value without taking control of the day to day running of it. If it has been previously agreed, or if the business plan has not been followed, they sometimes elect a management team.
In summary, the main characteristics of private equity are:
• Risk: the allocation of capital doesn’t have any personal or real guarantee.
• Orientation towards innovative companies: that has the following four characteristics- good management team, high growth potential, a real competitive advantage and real possibilities for divestment.
• Temporary and usually minority share: looks to provide stable financial support in times when it is hard to get. If these initial stages are overcome, the private equity will give way to other investors, recovering their original investment as well as capital gains in return for the risk taken.
• We advisors say that there is no such thing as majority or minority, only good or bad shareholder agreements. Therefore, the agreement is as important as the type of shares.
• Management support and added value: the investor plays a part in board meetings, not only to monitor the investment, but also to provide expertise and ease access to potential partners, clients and suppliers.
• Compensation via capital gain: once past the greatest risk stages, they look to be substituted by other investors, receiving compensation for the risk taken and the help provided.
If your company is growing and has the four characteristics mentioned above, then private equity can help you. It can also help you if you’re looking to sell your company or give it over to management.
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