Private equity is ownership or stake in a company that is not publicly listed. The funding used for this comes from high-net-worth individuals and firms looking to take a public company private and delist it from stock exchanges. With firms in particular, they allocate investment capital from institutional investors such as mutual funds, insurance companies, or pensions. Private equity has become widely accepted as a key component of investment portfolios. The reasons for this are the attractiveness of risk-adjusted returns, low correlation to equities and bonds, and protection from market scares.
For companies that have private equity funding, an advantage for their growth is the relationship a firm and management can have. This relationship can provide mentorship and industry expertise. This not only helps a company grow, but also reduces the risk a new company can pose to investors.
3 Types of Private Equity Strategies:
1. Venture Capital
Early stage startup companies undergo "seed rounds" to have access to working capital. Typically this type of investment does not require majority share of a company given the company has yet to prove its capabilities. The risk-reward relationship with this funding for investors leads to uncertainty. However, the potential ROI of a startup could be far beyond expectations.
Around 20% of startups fail in their first year, and 60% in the first three years. With that being said, the typical causes for this include a lack of funds, being in the wrong market, a lack of research, bad partnerships, and not being an expert in the industry. All of which can be aided by relationships found through private equity firm funding and relationships!
2. Growth Equity
Growth equity is capital investment in an established, growing company. This is when a company has plateaued in its growth, making the most of its previous funding rounds. With this plateau of growth, there is one situation that stands out among investors. If a company has consistent records of growth and does not immediately need funding to be successful, that is an ideal target company. Investors still require equity for funds, but a minority share is the most probable situation. Given the company has records to prove its growth strategy there is no need for a majority stake yet. The best resources available to investors during this funding stage are financial statements and client interviews.
At the final stage of a company's lifecycle, a buyout occurs when a public company is taken private and purchased by a private equity firm or its existing management team. The largest portion of private equity funding operates in this space.
Compared to venture capital and growth equity, this is the first situation that operates off of leveraged funds. The two types of buyouts are leveraged buyouts, and management buyouts. Management buyouts occur when the existing management team buys the company's assets and take a controlling share. This allows for a period of restructuring and internal improvement to continue growth and provide a return on investment. Management buyouts can raise funds through private equity firms where the firm would take a minority share alongside management's majority stake.
Private equity as an asset class features a host of opportunities to help add diversity to a portfolio, protect against inflation and market scares, and achieve potentially higher than expected ROI. At Company Finder, we can help with private equity opportunities through the companies and connections we have. Whether you are a new company or investor wanting deal flow, click on the "Invest" or "Get Funding" buttons on our home page to get started!