Private Equity usually refers to types of ownership interest via funding in private enterprises i.e. non-publicly traded companies with the exception of PIPE which is a Private Investment in Public Entity. It usually refers to these security types that are involved in the raising of equity capital through private placements instead of a company offering publicly its stock for raising capital.
In general, Private Equity investors are usually institutional investors or accredited investors who are usually high-net-worth individuals or wealthy families. Private Equity funds belong to the institutional type of investments and it is a common way for investors to make indirect investments in illiquid assets such as private companies or to exploit opportunities where they could not have access to if they hadn’t made their way through Private Equity. This is why the majority of investors of Private Equity firms are usually in the form of limited partners and they are mainly public pension funds, foundations, endowments, sovereign wealth funds, funds of funds, subsidiaries or other operating divisions of large corporations and family offices. All these entities, can commit large sums of money and they follow a long – horizon holding style. This holding style, gives the necessary security and time for the investments to grow and reach a mature level for either a public-style exit strategy through an Initial Public Offering, or for a profitable sale to another larger corporate entity. The sale could also be to another specialized private equity fund which has this type of transactional criteria.
Private Equity investments can potentially provide serious capital commitments that can assist private companies achieve their objectives in a way that in many cases, even public companies would like to imitate. The Private Equity capital helps the companies grow and expand to new geographies and markets, develop new technologies and products, restructure their Balancesheet, make new acquisitions of new assets or other companies and of course create a sustainable value for these businesses by strategically turning them around. These economic benefits are mainly achieved by the close work of Private Equity with their portfolio companies and their value enhancement approach throughout the investment period. However, for these benefits to take place, there must be smart synergies between the portfolio company and the private equity firm especially at a principle and core values level which would help avoid any future disparity between the two. A detailed business plan from the side of the company and an extensive due diligence from the side of the investment firm could identify in advance a number of factors that will affect the company and its business model. Fundamentally, Private equity investments differ from stock market investments as investors remain heavily involved in the company often by having a seat on the company’s board and by having regular and close communication with the company’s management, hence having an increased access to all internal information, processes and projections.
There are many different Private Equity structures. The main distinction derives primarily from whether the Private Equity fund invests on the formative stage of the companies or on the expansion phase. The timeline follows the typical growth phases of a company and has several different stages such as seed capital, start-up financing, first stage financing, second stage financing, third stage financing, and lastly mezzanine financing or bridge financing which is often a Pre-IPO capital mix of debt and equity. On the early stages typically we meet the angel investors and venture capital firms whereas on the later stages, we meet the middle market buyout and mega-buyout funds. Basically there are numerous combinations and types of Private Equity firms which depending on their strategy and size, they can provide different and financially engineered investing styles often by combining different types of equity and debt in a way that the expected outcome will be along the lines of their investment criteria and at the same time to provide a feasible solution for the portfolio company that receives the funding.
Private Equity market, has evolved remarkably through the years and can address a significant part of funding options and on a case by case basis without necessarily a loss of ownership from the enterprise to take place. What is important, is for companies to identify those solutions that are compatible to their business interests and at the same time cover sufficiently the requirements that are set by the standards and best practices of the investment industry.