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Private equity

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Published: 01 Jun 2016 Updated: 24 Mar 2021 Update History

Private equity firms can provide medium to long-term investments in established companies with high-growth potential looking to make significant changes.

What is private equity?

Private equity (PE) investors make medium- to long-term investments (typically four to seven years) in established companies with high-growth potential.

PE is a viable option for companies that are planning to make significant changes to scale the business – perhaps as part of an exit strategy – and can be an attractive alternative to listing on the stock exchange.

Unlike other forms of finance, private equity firms take a large stake, often a controlling stake, in the business, so this is a very significant commitment.

PE investors would usually aim to:

  • improve the profitability of the business through operational improvements; or
  • grow revenue through investment in product lines or new services, or expansion into new territories.

Private equity firms will also typically introduce corporate disciplines and a management structure to the business, to give it a platform on which it can grow further.

It can be a complex, costly and time-consuming process securing PE investment, and you can find out more on the British Venture Capital Private Equity Assocation (BVCA) website, and then seek professional advice.

The private equity model

The PE model of governance consists of the combination of strategic, financial and operational expertise. Non-financial support may include strategic advice, as well as facilitating access to established marketing or distribution channels.

PE investors actively manage their investment for a fixed period. After this they typically exit their investment, selling their shares, having seen the value of the invested company grow.

In direct contrast with stock market listing, this means that the PE model is not a permanent source of funding. However, it may be more appealing to many, especially those who plan to make far-reaching changes within the business, because their operations will not be subject to the level of scrutiny that occurs with listing on the stock exchange.

A PE firm may exit the relationship in one of four ways:

  • trade sale of their stake in the business;
  • sale to another investor;
  • stock market listing; or
  • employee ownership (sale to employees of the company).

Finance at every stage

Business financing is not a one-off decision, but an ongoing and evolving situation. No decision can be made in isolation to the businesses journey. Find out more about what options are suitable now and what might work at another stage.

Business Finance Guide
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