Private equity funds invest in fast-growing industries and companies, acquiring significant, including controlling, stakes and actively participating in management.
Primary activity of private equity funds is long-term investing in the form of acquiring companies’ shares, both secondary shares (i.e. buy-out from existing shareholders), and new shares (newly issued shares to finance the company):
- The combination of both options is possible, depending on the company’s financing requirements
- Hybrid financing is possible (in the form of the debt instruments convertible into shares, etc.)
A private equity fund invests according to the declared investment strategy, which can specify target industries and/or regions, limit the minimum and maximum size of investment, the size of the acquired stake, the degree of involvement of the fund in the target companies, etc.
The return on the investments is dependent on the development of its portfolio companies, therefore private equity funds are motivated to achieve stable growth of their portfolio companies and value creation by active involvement in these companies together with their management and existing shareholders
Traditionally, the investment term is 3 to 7 years. After this period the fund seeks to exit the investment via IPO, sale of stake to other shareholders, the company itself, or to external investors
Key benefits of partnership with a private equity fund
Source of financing
- The company or its shareholders get access to equity financing in a rather short timeframe (for example, compared to IPO, which takes from 6 months to a few years to prepare). Private equity financing does not require the company’s cash flows to finance interest and principal repayments, which is beneficial for new and fast-growing companies
- "Private" source of financing – as opposed to debt financing or IPO, the fact of the partnership with the fund (in particular details of this partnership, i.e. the valuation of the company, the size of stake, and other terms) can remain confidential (if the parties so wish)
- Opportunity to raise additional debt financing (based on increased equity capital)
Seal of proof / image benefits
- Private equity investment in a company is viewed by its partners, counterparts and clients positively, as recognizing the strength of its management and shareholders, the stability of the business, the proof of the business model – "... If highly professional financial experts gave money to the company, that company can be trusted..."
Maintaining operational control over the company
- Depending on circumstances, private equity funds may not target acquiring operational control in companies
Expertise / independent view
- With expertise in various industries and regions, the fund’s team has a wide experience in optimization of business processes, restructuring (legal, tax, operational), industry consolidation and expansion by acquisition of other players, development of growth strategy, raising financing, helping company to tap capital markets (IPO, Eurobonds, credit notes), etc.
- Most funds possess an extensive network of highly professional and experienced experts and advisers from various industries who can be involved in resolving short-term or long-term issues and achieving the company’s targets
- Being an active shareholder in the company, private equity funds monitor the management’s activity to ensure the interests of all shareholders in the company are observed