Private equity deals can help gather perhaps billions of dollars. At the same time, there are also chances of losing your control on your business. This is indeed a complicated area something that you need to know in details when seeking venture capital.
Functioning of Private Equity Firms
Private equity fund seeks to invest in businesses. It also desires to sell off its stake in a period of five years to make substantial profits. On the other hand, venture-based capital is found to be focused more upon early stage firms having high growth potentiality. Hence, private equity companies tend to invest in different companies. They are often mature firms with long trading history. These companies may require funds to recover from some financial problems or to fuel growth. Available funds are another major difference to note. Stakes are much higher with private equity. Average deal size of private equity is approximately $1 billion.
Suitability
It is indeed a fabulous financing option, however, suitable for bigger organizations. Moreover, deal structure is quite different. Against this large investment, equity private firms do expect the business to offer a larger stake. They are not interested to remain passive minority investors. What they desire is a majority stake while eager to control the business to generate more value.
Advantages
1. Active Involvement:
There are several fundraising environment opportunities to be availed. But the lender/investor is found to have minimal involvement to operate the business. Private equity companies are found to be more hands on. They can assist re-evaluate every aspect concerning the business to optimize its overall value. What if their idea to optimize value fails to match that of yours? However, experienced professionals if involved intimately in the business might help with major improvements.
2. Large fund amounts:
A good amount of funds can be sourced from private equity. The deals can be millions of dollars. The portfolio firm managers can make good use of the collected funds to promote business growth. The impact made by that amount on the firm can be huge.
3. Incentives:
Private equity companies come up with strategies to create a viable fundraising environment to meet their investment requirements. But then this amount needs to be paid back. Also investors should be provided with better returns. To achieve this, your business needs to succeed. The private equity company’s individual partners also would have invested their own money. On making profits, they can derive additional money in the form of performance fees. This way, they can enhance your business value by having powerful personal incentives.
Disadvantages
1. Losing management control:
Apart from your venture capital investment, there are also chances of losing control over your business. This is because of the active involvement of the private equity company in your business. Although a good thing, it will mean, you will not have control over basic elements. It includes hiring/firing employees, setting strategies, selecting management team, etc. Other options are relinquished control. Loss of control will be much greater since the equity company’s stake will be higher. It holds true when ‘exit strategy’ of PE firm is concerned. It might also mean selling off the business outrightly.
2. Ownership stake loss/dilution:
Other funding options allow your portfolio firm managers to work independently and you staying in control of your business. More money can be derived from private equity. However, you lose a lot as they demand a major stake. Perhaps, you will be left with nothing or very little of ownership.
Therefore, if you plan to involve Private Equity Firms to improve your business funding and prospects, do take into consideration the above aspects.
