Private equity funding can represent an attractive source of finance for many businesses. In principle, the practice is very straightforward. But getting the best from private equity can be tricky. Let’s take a look at the benefits and challenges associated with it.
Understanding Private Equity Investments
So, what is private equity, exactly? Put simply, it’s a kind of alternative investment, along with venture capital and hedge funds. A private equity firm will operate an investment fund, which it will use to buy assets, like businesses and commodities. In most cases, they won’t buy publically traded companies, whose shares are listed on exchanges like the FTSE.
In most cases, private equity companies are about gains in the long and medium term. They’re happy to take a loss in the short term in order to pursue a strategy that will bear fruit further down the line.
Legal and Financial Due Diligence
Successful private equity firms are about to distinguish between quality investments and inferior ones. This means performing due diligence – inspecting the accounts and records of a business and determining whether the investment carries risk. This process can determine what action, if any, can help the business to comply with any regulations.
Structuring the Deal
There’s more than one way to buy a stake in a business (or to buy the business in its entirety). Buyouts and minority interest investments can help to spread, or concentrate the risk associated with a particular portfolio. If a private equity firm wants to provide a promising business with the capital it needs to grow, then a growth capital investment might be what’s required.
Whatever the structure of the deal, the right legal expertise can help to ensure that it is legally binding. This will help to protect both parties. Good lawyers specialising in private equity will also help to ensure that investment decisions are being made, or not made, based on the merits of the deal, not because of a desire to avoid legal complexity.
Managing Risk and Exit Strategies
Of course, not all private equity deals pay off. Sometimes, outside factors, like supply chain disruption and market volatility, can make a promising business underperform. Insurance and diversification can help protect against risk, but investors might also sometimes need a way out. Designing an exit strategy before it’s needed can be hugely helpful.