FAQ’s
Q.: What is private equity?
A.: Private equity firms provide long-term equity finance to unquoted companies by investing money in the form of shares or shares and shareholder loans. These companies are not quoted on public stock markets which is why it is called private equity. Private equity firms raise money for two different types of funds - venture capital funds and buy-out/growth funds.
Q.: Why is private equity a better form of ownership than quoted markets?
A.: Private equity is not better or worse - it's a different way of owning companies. In some circumstances the governance structure and the alignment of interest between owner and manager makes it easier to turn round companies or develop them. But the two forms of ownership are complementary. After all, many IPOs (initial public offerings) are of private equity-backed companies. And IPOs account for about 20% of private equity exits. Recent independent research commissioned by the BVCA and the London Stock Exchange clearly demonstrated private equity/venture capital backed companies floated on the stock market outperformed similar companies that had not received industry investment.
Q.: What about debt - why is it required?
A.: Almost every company, public or private, has a capital structure made up of equity (stocks) and debt (bank loans, bonds, etc.). When a private equity firm invests in a company, they arrange financing which is made up of equity they invest from their funds and loans from a variety of different sources.
The level of debt appropriate for a particular company is a function of the general economic outlook and the nature and needs of the business itself. A young developing company may have no debt funding, whereas a mature company with a strong cashflow can comfortably sustain a high level of debt in its capital structure.