What is Private Equity?
Private Equity (PE) is a way of raising capital that many business owners utilise on a regular basis in the United Kingdom and around the world. While it is applicable regardless of the size of your business and is much more widely used than many people realise, most private equity firms have thresholds in place which determine what investments they make.
In its simplest terms, private equity is a way for a company to raise money by allowing investors to invest money in exchange for equity in the firm or an ownership stake. This type of investment is typically made into businesses that are well-established and mature instead of new startups.
What Are Private Equity Firms and How Do They Work?
Private Equity firms are serial investors that specialise in finding businesses to invest in, which they believe have excellent growth potential. They usually raise funds from private investors or limited partners and then invest that money in a portfolio of companies to benefit in the long-term from the potential growth that they anticipate. In most but not all cases, private equity firms aim to take a majority stake in the ownership of a firm when they invest.
They are focused on minimising their risk exposure and maximising potential profits. They normally look to invest in a range of different companies and / or industries (based on their investment strategy) in order to spread the risk. The companies which PE firms invest in are called their portfolio, and within the industry, these companies are often referred to as portfolio companies.
Private Equity investors start by raising a large pool of capital from a range of different limited partners. The money raised is referred to as the private equity fund. Each fund usually has a capital target, and once that target has been achieved, that particular fund is closed and then invested in companies that the private equity firm believes have significant potential.
Private Equity firms are focused on achieving the best return on investment possible for their money.. In order to achieve that, private equity firms often use an acquisition method known as leveraged buyout.
In a leveraged buyout, investors purchase a stake in the company they are investing in, typically using a combination of equity and debt. This debt will have to be repaid by the company eventually, but the investors aim to dramatically improve the profitability of the company, which ultimately will then reduce the burden of the debt repayment.
The exit strategy for most PE firms involves the eventual sale of that particular company to either another business or another investor, making a profit in the process. Any profit made is then distributed to the limited partners in the PE fund or returned to the fund, where it can then be used for future investment opportunities.
What Is The Difference Between Private Equity and Venture Capital?
Many people do not realise that venture capital is a form of private equity investing. The main differentiating factor between the two is that private equity firms focus on investments in established traditional and stable businesses, which they believe have the potential to grow. Venture capital firms target more risky early-stage startups.
Help and Advice Regarding Private Equity
If you are interested in discussing whether private equity is the right option for your business, the team at AW Capital will be more than happy to answer any questions you might have. To book a free no-obligation consultation, contact us today on 0333 772 6165