Private Equity Definition

The mention of private equity in a conversation is often met with a lot of confused faces. Most people, outside of corporate types, aren’t familiar with what it means. But that doesn’t mean that its complex. Business may be laden with sometimes incomprehensible finance terms, but private equity isn’t one of them.

Private equity is money that is collected from a group of different sources. These sources often include pension funds, banks, savings accounts and the bank accounts of private equity investors themselves. Once private equity is collected, it is invested into ripe business opportunities that pay dividends to all contributors.

Private Equity Firm Definition

Private equity firms specialise in investing in companies that can deliver healthy returns. Unlike normal investors, when private equity firms put money into a business they take a leading role in how a company is run. In return for their investments, many of them take on position’s on company boards to help guide a company to a more prosperous future.

Venture Capital and Private Equity Definition

Though they are often confused, venture capital and private equity are used for two very different types of investment.

Venture capital is invested in smaller enterprises, such as start-ups, to help to get them up and running. This is how many app developers and tech gurus secure the funding to turn their concepts into reality.

Venture capital is what is being offered by investors on Dragon’s Den when they pledge to put money into high-potential business proposals. On the show, the likes of Duncan Ballantyne, Peter Jones and Deborah Meaden are all performing as venture capitalists looking for the latest game-changing business ideas.

Private equity, however, is usually attracted to more mature companies that have already established their place in the market. They generally already have years of experience in their sector and already have the existing infrastructure to support growth. An example is security company ADT, which was partly acquired by private equity firm Apollo when it was struggling in 2015. In the space of three years, Apollo floated ADT on to the New York Stock Exchange.

Though private equity firms often only buy out a stake in a company, there are instances when they purchase them outright. With full oversight of the business, these firms can take it in a direction that is fully compatible with the interests of its shareholders.

A private equity investment is considered to be ‘good’ if it delivers a return that is three times larger than the original investment. That means that private equity firms are incredibly selective when it comes to choosing the right investment; the majority of struggling companies don’t make the cut.

Why is Private Equity Important?

For struggling businesses, private equity can be a final lifeline. It can be the difference between a business going bust or staying afloat. That said, it’s also valuable for businesses that just need a fresh set of ideas. Private equity firms possess the expertise required to help restructure a business to make it more profitable, or to cut out unnecessary inefficiencies.

A bonus is that all private equity investors have a financial stake in a business changing for the better. This is unlike financial advisors, who offer assistance from a distance and have no personal stake in the future of the business.

There have been several convincing examples of private equity firms revitalising tired companies that are struggling to make ends meet. For instance, Apollo also acquired Verallia - the world’s largest producer of glass bottles - in October 2015. By providing the necessary capital and helping the company to streamline its business operations, Apollo helped Verallia to cement its dominant position. Now, instead of being a part of a brand portfolio of a parent company, Verallia is operating successfully as its own independent company.

What are the Problems with Private Equity?

But private equity isn’t all swings and roundabouts. Investments can go wrong, and private equity firms can end up leaving companies in the gutter.

A major drawback is that a company’s employees are usually shaken when they hear the news that their employer is being taken over by a private equity firm. They are notorious for taking a ruthless attitude to inefficiency and tend to not be interested in the human cost of such measures.

Since the economic crash in 2008, private equity firms have not been performing as well as they used to. In the period 2002-05, 35% of all private equity investments were considered ‘good’; in 2010-13 that was only considered true for 20% of investments.

It could be argued that private equity firms are restricting themselves in the current market in refusing to invest in start-ups and SMEs. In a world of rapid-changing tech, these are often the most lucrative business opportunities.

But, of course, private equity firms refuse to invest in small businesses for a reason. As they’re less likely to flop, larger companies offer more investment security. This is especially important in this industry, as private equity firms tend to only undertake medium to long-term investments that require large amounts of capital.

How can my Franchise Generate Private Equity?

If you own a franchise then you are in a good position to secure private equity. Private equity firms only target developed businesses that have already undergone some degree of expansion. If you’re interested in securing private equity for your franchise, it’s worth considering a few things first:

Do you think that your business could benefit from the breath of fresh air that comes from external investors?
Do you need to help in raising the necessary capital to propel your franchise onto new horizons?
Do you believe that your franchise could be restructured to save on efficiencies, but don’t know where to start?

If the answer is yes to all of those questions, then securing private equity capital could be of benefit to your business. That being said, it is usually the case that private equity firms approach companies that they think represent a sound business investment, rather than the other way around.