What is private equity

Private equity provides long-term, committed share capital, to help unquoted companies grow and succeed. If you are looking to start up, expand, buy into a business, buy out a division of your parent company, turnaround or revitalize a company, this is a good finance option that could help you to do this.

Obtaining this kind of financing is very different from raising debt or a loan from a lender, such as a bank. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of your success or failure. Equity finance is invested in exchange for a stake in your company and, as shareholders; the investors’ returns are dependent on the growth and profitability of your business.

This kind of financing originated in the late 18th century, when entrepreneurs found wealthy individuals to back their projects on an ad hoc basis. This informal method of financing became an industry in the late 1970s and early 1980s when a number of private firms were founded. It is now a recognized asset class. There are over 170 active UK equity financing firms, which provide several billion pounds each year to unquoted companies, around 80% of which are located in the UK.

Many small companies are “life-style” businesses whose main purpose is to provide a good standard of living and job satisfaction for their owners. These businesses are not generally suitable for equity investment, as they are unlikely to provide the potential financial returns to make them of interest to an external investor. “Entrepreneurial” businesses can be distinguished from others by their aspirations and potential for growth, rather than by their current size. Such businesses are aiming to grow rapidly to a significant size.

As a rule of thumb, unless a business can offer the prospect of significant turnover growth within five years, it is unlikely to be of interest to a equity financing firm. Equity finance investors are only interested in companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality. However, provided there is real growth potential the equity financing industry is interested in all stages, from start-up to buy-out.

Why private equity?

Private equity backed companies have been shown to grow faster than other types of companies. This is made possible by the provision of a combination of capital and experienced personal input from private equity executives, which sets it apart from other forms of finance.

This financing can help you achieve your ambitions for your company and provide a stable base for strategic decision making. The equity financing firms will seek to increase a company’s value to its owners, without taking day-to-day management control. Although you may have a smaller “slice of cake”, within a few years your “slice” should be worth considerably more than the whole “cake” was to you before.

Equity financing firms often work in conjunction with other providers of finance and may be able to help you to put a total funding package together for your business.

Private equity financed companies require effective corporate governance.