Private equity comprises of equity securities which are not offered to public through stock exchange. This type of investment capital comes from rich individuals and organizations in lieu of equity in firms. Distinct from venture capitaland angel investment, this business funding individuals will not acquire a major control over the startups. The private equity company associates invest funds and sees to it that a satisfying ROI is yielded in a span of four to seven years. The private equity strategies include leveraged buyouts, mezzanine capital, growth capital, venture capital and distressed investments.
Private equity investments often focus on total control over a firm with high ROI expectations. Private equity investment is done on assets that the buyer wishes to acquire. Private markets are the providers of funds for private equity investments which in turn are used to finance public or private firms. Over the years this type of investment has become popular. The concept of private equity investment is, acquire a company and achieve a target as payback. The change is only in deals. Huge buyouts are the current fad across the world.
About Private Equity
Private equity funds can be used to acquire shares from private firms. The minimum capital amount required for investors differ according to the fund raised and the nature of the business. The fee structure of private equity firms differs with performance and management fees being the two categories. The two crucial functions of private equity firms are:
Deal origination has business generation, development and sustenance through acquisitions and mergers as its features. A deal flow is a potential acquisition opportunity for private equity firms that are put to scrutiny. The firms have hired staff to reconnoiter the transaction markets. This will reduce the brokerage fee associated with investment banking. Investment banks usually generate their funds and are good bidders and deal referrals. Private equity firms and investment banks often compete to enter into good buyouts. Portfolio oversight is another function crucial to private equity investors where the professionals offer support to the firms’ subsidiaries and their administrations.
Investing Preferences of Private Equity Firms
There are passive and active private equity investors in the market. Passive investors follow rigid rules. They depend on the administration regarding the development of the company and earn returns. This is considered to be a commoditized approach. The active investors offer support to management in operations thereby facilitating in its growth. Active private equity investors have wide contacts and high level relationships which help in business development.
A private equity investor who can add value to the venture with intellectual support along with monetary support will be the best choice for startup enterprises. It is up to the entrepreneur to select carefully the best investor and investment mode. A large majority of transactions are done in middle and small markets which are not usually the forte of investment bankers who look for huge deals. Medium size businesses score over high investment ventures in customer service and products. The middle-market firms garner huge profits to private equity investors than any other ventures. This is the major factor that pulls private equity investors to invest in such startups.
A small venture can develop through various international channels that they build up over a period of time. Other option of private equity firms is to consolidate small companies by acquiring it to make it a bigger conglomerate.
Exit Strategy of Private Equity Firms
Private equity investors take care of the development of the company prior to divesting it to a bigger entity. This transaction often gains a huge profit. To draft such an exit strategy the private equity investor needs to have credible and capable management. The managers of the firm get bonus and equity compensation for reaching the financial goal, which is core to the exit strategy.
Investment Options of Private Equity
There are some investment options for private equity firms which are chosen according to their conveniences and preferences. Some of them are:
Leveraged Buyouts : In leveraged buyouts, a company is acquired with borrowed money where the assets of the buyer and acquired companies are pawned. Such buyouts enable companies to make big deals sans huge capitals. The debt and equity percentages ratio in leveraged buyouts is 90:10 due to which the bonds are considered junk bonds.
Mezzanine Capital : Another private equity investment option is the mezzanine capital which is usually considered as a committed loan for a medium term. The risk involved in such capital investment depends on the amount invested. Mezzanine investment can be done either as preferred stock or as debt. Mezzanine investment is often required by small size companies and expects higher ROI due to the high risk factor in such type of funding.
Growth Capital : Growth equity, as it is otherwise called, is a private equity investment mode in developing companies that seek fund to expand further and spread to new markets. Growth capital also facilitates in revamping the balance sheet and cut down debt. This investment is often considered as preferred equity or common equity.