What Is Private Equity?
Private equity is a form of private financing where investors invest funds or capital into a company.
Private equity is a capital investment made by investors into companies that are not yet publicly traded. Usually, the investors involved in private equity are institutional investors, venture capital firms, or angel investors, who can dedicate substantial amounts of money for long periods.
Private equity investments require that investors be willing to hold on for a considerably long period before getting their capital and returns to enable the in-flow of money from public sources. For instance, investors who invested in the private equity round of a company may need to wait until the company’s initial public offering (IPO) to cash out their investment.
Investors seek out private equity because it offers them an opportunity to earn higher returns than they would have gotten if they waited to buy the shares of a company in the public equity markets. Each investor has its own goals, preferences, and investment strategies; however, all provide working capital to a new company to facilitate the growth or development of products in exchange for a substantial return on their investment.
Private equity investment offers some advantages for companies and start-ups. They include:
- Offers an alternative means of raising money instead of traditional standards such as bank loans.
- Can help entrepreneurs finance their ideas and early-stage companies.
- Can offer start-ups the liberty to attempt unorthodox growth strategies without much pressure.
There are also disadvantages to private equity investment for companies and start-ups. They include:
- Negotiations determine the shares prices of a company in private equity, not market forces.
- Investment firms may be able to make decisions regarding the management or structure of the business.
Private Equity Example
Juliet has an idea for a new tech company. However, she does not have the funds to set up a company and hire people to work on the concept. Juliet approaches a venture capital firm with the idea and convinces them to invest a certain amount of money in exchange for shares in the company. With the investment from the venture capital firm, Juliet sets out to build the company she envisioned.« Back to Glossary Index