Private Equity – The benefit of this type of funding for private companies
Private Equity (PE) is a form of alternative investment of capital into companies which do not trade on the public exchange. The funding comes from investors (high-net-worth individuals) and firms who invest directly into private companies or acquire control of public companies with the plan to take them to private, away from the stock exchange.
PE firms perform two key functions which are highly beneficial for private companies:
- deal origination/transaction execution; and
- portfolio oversight.
The first is aimed at creating a large number of high-quality deals by establishing and maintaining relationships with investment banks, M&A intermediaries, lawyers and other professionals. The latter sees PE firms introduce new and often more efficient systems into companies, along with supporting and guiding companies’ executive staff through financial management and strategic planning.
A key advantage of this type of funding is the “active ownership”, with PE managers working closely alongside the companies’ management team to achieve sustainable business growth. This governance led structure reduces lines of communication between the investors in a company and its managers, and results in decisions being made from those working in the business on a day-to-day basis. PE funds have a “life-span” in which the firms will look to hold the investment. This does vary with each investment and once expired, the firm will look to exit by selling their stake in the company.
Covid-19 has been a catalyst for increased private equity investment in the technology, services and healthcare sectors, with a real focus in the financing and acquisition of healthcare businesses, med-tech and biotech. The market’s reaction to the pandemic has led to debt funds increasing their cash reserves and in addition, it has resulted in investors moving a proportion of their portfolios into lower-risk investments, whilst others have taken it further and switched to cash. Holding cash and other less-volatile assets suggest that they are creating a pot ready to invest once share prices fall to a more attractive level. This readily available cash could be the lifeline for many private companies following the pandemic.
Investors will often approach those businesses which they are interested in, however a business can also approach them. For those companies who are interested in obtaining PE funding, it is recommended that they seek independent financial advice from an accountant, financial advisor or other intermediary. It is worth noting the process from enquiring to obtaining the funding can take up to one year.