Private Equity

Private equity is a finance type where a business' management team sells a large or controlling stake of the business to a private equity firm.

By partnering with a private equity firm, the business gains access to capital and strategic guidance to support its growth. In exchange, the private equity firm typically acquires a significant or controlling stake in the business. 

How does private equity work?

Private equity investments are commonly used to support management buyouts and management buy-ins within established companies. This differentiates them from venture capital, which focuses on funding early-stage or younger businesses.

Private equity governance typically only has a very small number of investors who interact directly with management on a continuous basis. This hands-on, or "active ownership," approach allows private equity managers to work closely with management to help the business grow.

Efforts may include driving top-line growth, achieving efficiency gains, optimising cash flow, streamlining procurement and supply chains, strengthening marketing and sales strategies, improving reporting systems, and enhancing human resource processes.

Private equity firms typically hold their investments for a period of four to seven years. After this, they seek to exit, which may involve selling their stake via the stock market, transferring ownership to a corporate buyer, or selling to another investor.

What are the benefits?

There are a number of potential benefits to private equity, including:

• substantial investment: a business receiving capital from a private equity firm could see tens of millions of pounds being invested
• professional help: investors leverage their expertise to help drive the company's growth strategy. Their primary motivation is to enhance the value of their shareholding, ultimately increasing their potential return on investment
• exit strategy: private equity funds typically develop a strategy from the outset to enhance a business's appeal to potential buyers. This process is usually carried out over a four to seven-year period.

What are the potential drawbacks?

Like all finance types, private equity can bring with it certain disadvantages, including:

• loss of control: selling a large or controlling stake in your business means forgoing control of the business, with the private equity firm likely to be involved in areas of the day-to-day running of the business
• no guarantee of growth: even though it is the intention of a private equity firm to increase the value of a company through growth, there is no guarantee that this will actually occur
• quick exits: private equity investors often plan to sell their shares within a four-to-seven-year timeframe. It is important to prepare a clear strategy to manage this transition effectively when the time comes.

How do I access private equity?

Intermediaries like lawyers, investment banks, or financial advisers may reach out to you regarding potential opportunities.

Alternatively, private equity firms might contact your business directly. You also have the option to approach these firms on your own initiative by searching online.