Understanding Private Equity: What You Need to Know

StrategyDriven Managing Your Finances Article | Understanding Private Equity: What You Need to KnowIf you are looking for an alternative investment method, you might want to consider Private Equity investment. This involves investing in capital, also known as equity, that is not publicly listed or traded. The parts of a company that are available to be invested in are not publicly owned, quoted or traded on a stock exchange. Deciding if private equity is the right method for you can be tricky as it mainly comes down to your feelings on opportunities on a case-by-case basis. However, understanding function that private equity investments play and the opportunities they can offer businesses and investors alike will help you make these decisions further down the line.

Why Do Companies Opt for Private Equity?

The purpose of private equity is to raise additional funds in order to bring about a positive change in the company being invested in. This can cover situations such as growing a business (which requires ‘growth capital’ for expansion or development); financing operational changes such as restructuring to make the business more profitable; financing acquisitions of other companies; or delisting a public company in order to give it private status. The latter gives a company the opportunity to focus on long-term growth without the pressures of quarterly earnings reports. Private equity also offers businesses access to funds where they would be unable or unwilling to source financing from traditional sources such as business loans.

What Are the Different Types of Private Equity Funding?

  • Leveraged Buyouts involve buying out a company, improving it and then selling it on for profit. This is the most common example of private equity.
  • Distressed Funding is where money is invested in troubled or even bankrupt companies and turning them around by making necessary changes or selling off assets such as machinery, patents or property. This type of funding is also referred to as ‘vulture financing.’
  • Venture Capital is a form of private equity in which private investors (sometimes referred to as ‘angels’) provide capital to entrepreneurs. An example of this is the television program Dragons’ Den.
  • Real Estate Private Equity commonly involves funding commercial properties and Real Estate Investment Trusts. This type of funding involves higher minimum capital in comparison with other types of private equity funding and involves longer investment terms too.
  • Fund of Funds is the most accessible form of private equity. It primarily involves investing in mutual funds and hedge funds, which offer the opportunity to invest where you may not be able to meet the minimum capital alone.

What are the Benefits and Disadvantages for Investors?

For the investor, private equity offers the opportunity to invest in early-stage companies and ideas such as with venture capital opportunities. As with any investment opportunity, there are significant risks involved in private equity, but it presents the unique opportunity of funding companies and innovations that align with your personal interests. Using investment insights in order to gain full understanding of the opportunity at hand will be of vital importance for many private equity investors. Many people see private equity as an opportunity to invest in improvement and believe that firms seeking private equity are more likely to give higher returns due to their drive for growth.

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