Private Equity in simple terms, means investing money in privately-held companies, i.e. they are not publicly traded on stock exchanges. These companies can be of different sizes and industry, Start-ups, established business houses from various sectors like technology, healthcare, manufacturing etc. Private Equity is a financial strategy which is employed by companies to grow their business.
It involves investing money in private companies in exchange for ownership and is usually carried out by private equity firms or individuals with lot of financial resources. Private Equity is a powerful tool for entrepreneurs because it provides access to capital, expertise and other resources that can help businesses to expand and develop.
Let us explore about Private Equity process, its working and the way it helps entrepreneurs in their business goals.
a) Fund Raising
Private Equity firms usually raise funds from different sources such as High-Networth Individuals(HNI), Pension Funds, Institutional Investors like Insurance companies. These funds are pooled together to create a private equity fund.
b) Sourcing of Opportunities
Private Equity firms actively seek investment opportunities. They identify potential investors through industry research and networking by approaching entrepreneurs, businesses looking for capital.
c) Due Diligence
Private Equity firms conduct detailed due diligence of the company in which capital is to be invested by thorough examination of the company’s financials, operations, market position and growth potential. Due Diligence helps to access the risks and opportunities associated with the investment.
d) Negotiation of terms of investment
After Due Diligence is completed with satisfaction of both the parties, private equity investors negotiate the terms of investment. That includes amount of capital to be invested, the equity stake to be received by the investor and the probable governance structure of the company.
e) Active role in the Management
Private Equity firms take an active role in the management of the company’s performance. They provide strategic guidance, access to expertise, and may suggest changes in the operation to increase their efficiency and profitability.
f) Creating Value
The primary goal of private equity investors is to increase the value of their investment period. They operate closely with the company’s management to implement their suggestions and strategies in expanding into new markets, launching new products, or optimizing operations.
g) Exit Strategy
Private Equity firms generally have predetermined exit strategy, i.e. they might plan to sell their equity stake in the company at a later date. Common exit strategies include selling the company to another business, taking it public through an Initial Public Offer(IPO), or to undertake mergers and acquisitions.
From the above, we had understood about Private Equity investment and its working process. Let us see the advantages of Private Equity investment for entrepreneurs as given below:
a) Access to Capital
Entrepreneurs are assured of Capital for their business as Private Equity firms invest significant amount of money in promising businesses. This capital is then used for expansion of business, research and development activities, marketing and other capital intensive fields.
b) Professional expertise
As Private Equity investors invest their amount in the business, they exhibit a special interest in the success and growth of the Company. They share their knowledge and professional expertise to the Company. This enables the entrepreneurs to take potential decisions and sail through business challenges with much ease.
c) Access to business network
Private Equity firms have contact with network of professionals, advisors and other experts from various industries. This helps the entrepreneurs to have a partnership with distribution channels or new customers. It also assists them to find new suppliers and other business collaborators that may not have been possible otherwise.
d) Efficiency in Operations and Profitability
Private Equity investors often identify opportunities to streamline operations and improve efficiency. They also help the businesses in cost savings which results in increased profitability.
e) Long Term Vision and Growth
Private Equity investors are generally focused on the long term success and growth of the company. Unlike some short-term investors, private equity firms are more patient and willing to support a business through multiple growth phases. This helps the entrepreneurs in building sustainable and enduring companies for future.
f) Risk and Reward Sharing
The risks and rewards in the business are shared by the Private Equity investors. This provides a sense of security to the entrepreneurs in uncertain times and challenges faced by the company. The investor helps the company in finding solutions to such challenges rather than withdrawing their support to the company.
g) Assistance in future growth
Private Equity firms often assist the entrepreneurs in their future growth through Initial Public Offer(IPO) of their shares or strategic sale agreements. This helps the company to position their business for maximum value upon the exit of the Private Equity investors from the Company.
While Private Equity investment has its numerous advantages, it also has its share of disadvantages that are as follows:
i) Lack of Control
Entrepreneurs who seek Private Equity investment have to forego some of their control over their company. Private Equity investors usually have a say in all the key decisions and governance issues of the Company. This removes the autonomy of the entrepreneur in their own company’s operations.
ii) Decision to exit
Private Equity investors generally have a timeline in which they might consider to exit the company. Their timelines may not match with the entrepreneur’s vision in their mind. This may create a probable disagreement between them.
iii) Dilution of Ownership
As the Private Equity investor acquires an equity stake in the company, entrepreneur’s percentage in the ownership may decrease to that extent. This should be carefully considered by the entrepreneur if he has decided to maintain a specific percentage of stake in the company. This may become a bone of contention in future if it is not carefully thought upon.
iv) Pressure in working
Private Equity firms often set performance targets for the entrepreneur to achieve and this results in undue pressure and expectations for the companies they invest in. This sometimes prove to be very stressful for the entrepreneurs.
v) Additional costs for Company
With Private Equity investment in their company, entrepreneurs often have to incur associated costs and fees including management fees and also a share in profits. This may impact the bottom line of the company’s financial results.
Thus from the above, we can see that Private Equity investment as a financial strategy has its advantages and drawbacks. Although it can benefit the entrepreneurs with access to capital, expertise, network etc to accelerate the growth in the business, it’s also essential to weigh the disadvantages simultaneously.
Private Equity investment therefore, can be a powerful tool for the entrepreneurs to achieve their long term goals and success with ease.
SHREYASS FINANCE, assists budding entrepreneurs in securing Private Equity investments for their projects through their wide network of Family Offices, Angel Investors and Venture Capitalists.