Private equity has become more and more popular in the finance world and interest in the topic has grown significantly. You have probably heard it being mentioned various times in conversation and maybe not quite understood what it actually is. This article will help you understand the main principles of private equity and allow you to join in on the conversation!
What actually is it?
Private equity is a type of private financing that takes place outside of public markets and involves funds and investors directly investing in firms or buying them out. Their main goal is to invest in companies with a majority or minority stake. This way they can generate value over a period of around four to five years, enabling them to sell their share with the highest capital gain possible.
The investment span for private equity varies from mid to long term with a maximum of ten years. Standard investments for private equity include private company capital as this facilitates growth and success. In most cases, capital is returned in exchange for the risk incurred.
How do they differ from normal banks?
Moreover, private equity firms differentiate themselves from normal banks as they invest in your company in exchange for owning a part of it unlike banks who regardless of your company’s financial status will lend money with the expectation that it will be reimbursed with interest on predetermined dates.
Private equity´s profits and success will depend on the company they invested in. If it does well then so do they.
Private equity aims to increase your company´s success and value without enduring in the day-to-day tasks of actually running it.
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What are private equity´s main characteristics?
- Risk: the allocation of capital doesn’t have any personal or real guarantee.
- Orientated towards innovative companies: They are looking for companies with the following four characteristics: a strong management team, substantial growth potential, a distinct competitive advantage, and viable divestment options.
- Temporary and usually minority share: In periods when funds are scarce, their goal is to give stable financial support. If these early stages are successfully completed, private equity will give way to other investors, allowing them to regain their initial investment as well as capital gains in exchange for the risk they took.
- 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: Not only does the investor participate in board meetings to oversee the investment, but he or she also provides knowledge and facilitates access to new partners, clients, and suppliers.
- Compensation via capital gain: once past the riskiest stages, they look to be replaced by other investors, who will compensate for the risk they have taken and the assistance they’ve offered.
If you have a dynamic growing company which contains all the characteristics listed above then private equity may be a serious option to consider. It can also help you if you’re looking to sell your company or give it over to management.