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Private Equity- The what, the who and the why

 

Posted on 11 May 2017

What

Private is often a word we associate with secrecy, seclusion and exclusivity. This is right in some respects, however Private Equity simply refers to capital which has been provided outside of a public market. In essence, it is any capital in an operating company that is not listed or publicly trading on a stock exchange. Private Equity can refer to a host of alternative investing methods, ranging from buyout funds to growth funds.

Who

Private equity investment is usually provided by a private equity firm, a venture capital firm or an angel investor. Its purpose is to allow shareholders to sell a stake in their business or to inject capital into the company so that it can be utilised to nurture expansion for example, develop a range of new products or restructure the organisation completely.

Why

We may therefore ask - why do individuals and institutions choose to seek investment from Private Equity? As with most transactions, private equity investors ultimately wish to make a return and/ or increase shareholder value. A return may be yielded in a number of ways:

  • Income
  • Interest
  • Dividends
  • Capital gain

Private equity is primarily concerned with generating capital gains – simply put, a profit from the sale of property or an investment on final exit. This is achieved by acquiring equity stakes, actively managing and monitoring those stakes, and then selling or floating them once the initial investment has become more valuable. Private equity is an important form of investment as it generates liquidity within a private business, in turn fostering shareholder value, which fuels expansion and therefore economic growth.

For many shareholders it can be a way of selling part of their business now, combined with an injection of capital, so that the remaining shareholding is worth even more in the future. A win win.

Private equity is mostly used to fund management buy-outs. This allows vendors to sell their business, whilst allowing management to take ownership without them needing significant capital to do so (as private equity will provide the funds).   

If you would like any more information regarding private equity, please contact myself or one of our Corporate Finance experts who will gladly advise. 

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