What is Private Equity, and how does it work?

Private Equity is a fund set up to invest in or acquire Companies, either as equity or a combination of equity and debt funding.

Private Equity firms range in size and generally work with a business to grow and expand before exiting when they believe they will realise a high enough return on their investment (often 3 – 5 years).

Some funds are set up to maintain themselves on dividend income from their portfolio of companies and will, therefore, retain a shareholding for longer.

What’s the difference between Private Equity and venture capital?

• Private Equity is generally a larger fund that invests significant amounts in developed businesses, where a return on investment is much more likely.
• Venture Capitalists, on the other hand, tend to invest smaller sums in seed/start-up businesses; they’re riskier investments and the venture capital firm usually takes a larger shareholding.

Private Equity and venture capital can help businesses grow by providing expertise or contacts within industries. Some funds are sector agnostic, have set postcodes or regions they can work in or specialise in specific sectors (i.e., manufacturing/app development).

For businesses seeking investment

Private Equity firms provide an exit route for selling shareholders or can provide funds to businesses so they can grow the company.

How does selling to a Private Equity firm work?

Private Equity firms generally prefer a reasonably significant shareholding in a Company. They are flexible to ensure senior and experienced members of teams are incentivised - this can be done through EMIs or a small shareholding after the transaction. Then, the senior leadership team will be driven to help grow the business and can also benefit from a significant gain in the shareholding value.

What are the benefits of working with a private equity firm?

As outlined above, seeking private equity investment brings various opportunities and benefits for companies.

• Driving Growth: Private Equity investments are typically geared towards investment to accelerate growth.
• Access to Capital: Private equity firms bring substantial financial resources. This capital injection can fund expansion, invest in new projects, repay debt, or address other company financial needs.
• Expertise: Investors can provide valuable guidance and strategic advice to help the company improve its operations. They also bring expertise in ‘professionalising’ a business and positioning it to be attractive to sell, achieving a high valuation.
• Access to new Networks: Private equity firms can open doors to new business opportunities, customers, suppliers, and distribution channels.

What are the potential risks of private equity investment?

Some risks must be factored into plans for businesses seeking Private Equity investment. These, again, are not necessarily relevant to every transaction but are worth considering carefully.

• Loss of Control: Private equity investors often require a certain level of influence or governance rights, which may limit the freedom of the business owner or management team to make decisions independently.
• Misalignment of Interests: There can be conflicts of interest between the business owners and the investors, significantly if their goals diverge or change over time.
• Operational Interference: Investor involvement in operations can lead to clashes with management or cause cultural disruption.
• High Expectations: Private equity investors typically expect a significant return on their investment, which may require the business to meet aggressive financial targets.
• Exit Pressure: Private equity firms often have specific exit strategies in mind, which may not align with the business's long-term vision.

Should you seek advice on Private Equity?

If you are a business looking for investors, working with a Private Equity firm may be the solution you are looking for. However, you should work with qualified professional advisers in both legal and accounting and build as wide an understanding of private equity as possible.

The Shorts team can help you find the right investor who aligns with your values, goals and operational needs while maximising the value of the investment in your business on terms that work for you.

If you have any queries relating to Private Equity or any other Corporate transactions, our dedicated Corporate Finance team are happy to offer tailored advice to help you achieve the results you want.