Private equity is a source of investment capital acquired from institutions or individuals with a high net-worth to invest as well as acquire equity ownership in companies. Money must be invested for four to seven years.
Private equity funds can be used to purchase shares in private companies or delisted public companies. To invest in private equity usually requires a minimum amount of money ranging from thousands to millions.
For private equity investors the returns can be substantial. A small company selling niche products can offer services that larger companies do not. Such companies may be able to grow significantly by selling their products internationally. Private equity investors also look for companies that are underperforming. This may be due to neglect or unsuitable performance targets. Taking over such companies and turning them around can lead to higher profits than buying a company to sell. A popular exit strategy for private equity investors is to take on a company, grow, and develop it before selling it on to a large corporation. However, in recent years some of the best opportunities have been in specialist private equity funds.
Some of the advantages of private equity are that there are many opportunities for investment. Private equity firms are very selective about the firms they invest in and look for firms with the potential to grow and develop. With an engaged shareowner, able to act decisively, the management has the incentive to hit targets. Every investment by a private equity fund has to be liquidated during the life of the fund, which makes it possible to measure cash returns on investments. This also makes it possible to offer management rewards that are directly linked to performance.
Some of the disadvantages are the restricted access and substantial capital is required. Costs are higher and money has to be locked up for a long time to make a profit.
For British businesses, the advantage of private equity can be that the investors are committed to the business. Private equity investors can form good relationships with the company’s management with a common aim of expanding and improving the company. Start-ups can receive a vital injection of cash. However, some small business owners might feel that they will lose too much control and private equity might saddle a company with too much debt; private equity takeovers can also result in job losses. Alongside the successes of Staples and Sports Authority, there have been companies that have failed.
A good example of private equity in action is the purchase of Skillsoft by Charterhouse Capital Partners LLP. Skillsoft is a pioneering company in the field of learning and has a proven track record of innovating and delivering solutions for its many customers worldwide. Customers who range from governments and global corporations to small local businesses. Skillsoft offers its clients videos, courses and books that have been developed by leaders in their fields.
Another example is Pineridge Bakery, a Canadian firm specialising in branded baked goods. When it was bought out by a private equity firm revenue grew to CAD $230 million, 100 new jobs were created and the company invested $40 million in improving its operations.
Successful private equity investing can bring large returns, done badly it can also result in large losses. Understanding how the investment works and choosing a good firm to manage your investment is vital.