Three key considerations:
- Private equity is a viable option for established, growing companies that are planning to make significant changes to scale the business – perhaps as part of an exit strategy.
- Unlike other forms of finance, private equity firms take a large stake, often a controlling stake, in the business, so this is a very significant commitment.
- Private equity can be an attractive alternative to listing on the stock exchange.
What is private equity?
Private Equity (PE) investors make medium- to long-term investments (typically 4-7 years) in established companies with high-growth potential.
PE investors would usually aim to do at least two key things, such as:
- improving the profitability of the business through operational improvements; or
- growing revenue through investment in product lines or new services, or expansion into new territories.
Private equity firms will also typically introduce corporate disciplines and a management structure to the business, to give it a platform on which it can grow further.
It can be a complex, costly and time-consuming process securing PE investment, and you can find out more on the BVCA website, and then seek professional advice.
The private equity model
The PE model of governance consists of the combination of strategic, financial and operational expertise. Non-financial support may include strategic advice, as well as facilitating access to established marketing or distribution channels.
PE investors actively manage their investment for a fixed period. After this they typically exit their investment, selling their shares, having seen the value of the invested company grow. In direct contrast with stock market listing, this means that the PE model is not a permanent source of funding. However, it may be more appealing to many, especially those who plan to make far-reaching changes within the business, because their operations will not be subject to the level of scrutiny that occurs with listing on the stock exchange.
A PE firm may exit the relationship in one of four ways:
- Trade sale of their stake in the business; or
- Sale to another investor; or
- Stock market listing; or occasionally.
- Employee ownership (sale to employees of the company).
To find out more, visit the part of the British Venture Capital and Private Equity Association (BVCA) website dedicated to private equity.
To explore the other finance options for your business, go back to the Finance Journey tool.