Private equity is the capital which is not noted in a public exchange and is made of funds as well as investors that invest directly in private companies. They also engage in the buyouts of public ones which result in the public equity delisting. Capital is provided by retail and institutional investors for this and could be utilized in funding new technology, making acquisitions and solidifying and bolstering a balance sheet.
This comes mainly from accredited and institutional investors who are able to dedicate a substantial amount of money for long time periods. Its funds are managed by private equity companies which are investment firms which seeks stakes or partial ownership in privately owned businesses. Many of them are standalone firms.
They usually draw their investment pools from pension funds, wealthy individuals and others that manage investments. Its funds have the tendency to have longer horizons than those which hold securities that are publicly traded. A reason for this is the securities which are issued by the private companies are highly illiquid because public markets do not trade them.
The opportunities also for resale to other parties are very limited with difficulties added b the possible regulatory and contractual constraints. Another reason is that some privately owned equity funds have the tendency to act as among the partners in managing these companies which they back instead. They tend to do this rather than merely being a passive investor.
Approaching these firms is a great way for your business to get a large amount of funding but there is a risk of you losing control of your company. This is because the investor has more involvement when it comes to running your venture since they are more hand on. They can help reevaluate each of the aspect of your establishment in finding ways to maximize its value.
This may lead to problems since their ideas in maximizing value might not match yours but having involved in your business intimately could result in big improvements. These firms also want to see your venture succeed since the funding they provided were borrowed. They want to make sure that they would be able to pay them back.
Individual partners within the firm usually have invested their own money too, and when they make a profit, the performance fees they receive is making them additional income. This is a strong personal incentive for them to increase the value of your company. The combination of incentives, expertise and major funding could be very powerful.
When large amounts of money are involved, there are obviously some stings attached with it which might be considered its disadvantages. First is in giving up much of your share or stake in your own company, resulting for the control to not stay with you. This is because most firms demand majority stakes, sometimes leaving you with little ownership or even none.
You could also lose control of where your business is heading as they want to be involved actively. This means you might not be able to decide which employees to hire or fire. You may not even be capable of choosing your management team.