Equity finance
implies to selling some or all of one’s shares in the business in exchange for
a capital injection. Equity investors may include angel investors, venture
capital providers or private equity firms. Scott Tominaga mentions
that private equity investment provides valuable capital that can be used for
funding investment in technology, marketing, new offices or to make
acquisitions. It can also provide expertise from investors who are experienced in
operating businesses of varying types.
Scott Tominaga
provides an introduction to private equity investments
Private equity
investments or private equity funding tends to serve as a lifeline for
companies experiencing a variety of challenges, but cannot opt for public
trading or bank loans. In such situations, companies often turn to private
equity firms for aid. These firms can provide direct investment in the
business, without any requirement of a public listing. Moreover, they usually
do not hold stakes in companies that stay listed on a stock exchange.
Diverse types of
private equity investments tend to obtain capital from varying sources. These
sources can range from universities endowments, pension funds, and labour
unions to affluent investors and insurance companies. By leveraging distinctive
funding channels, capital investors focus on fuelling business growth. Private equity is commonly categorized
alongside venture capital and hedge funds as alternative investment funds or
AIFs. Ideally, this asset class demands long-term capital commitments from
investors, which ultimately results in limited access that is primarily
available to institutions and high-net-worth individuals.
Here are some of the
key characteristics of private equity venture capital:
·
Private Equity (PE) deals involve investing
in privately held companies that are not publicly traded
·
Investors can participate in PE through
private investment funds managed by professionals
·
PE funds often take an active role in
managing the companies in their portfolio
·
PE investments typically have a long time
horizon, with exits potentially taking several years
·
Due to the nature of private equity markets,
these investments come with a higher level of risk
·
While PE investors may benefit from potentially
higher returns, they must also consider the illiquidity of such investments
·
PE investment partners may provide capital
for expansion, acquisitions, or restructuring of portfolio companies
·
Valuing PE investments can be challenging,
and returns are subject to market conditions
·
Limited partners in PE funds generally have
less control over investment decisions.
Regulatory
considerations and potential changes in tax policies can impact PE investments.
Hence, it would be prudent for the investors to carry out a thorough due
diligence to gain a better understanding of the specific characteristics and
risks associated with PE before participating.
Scott Tominaga
underlines that private equity operates by investing in privately-held
companies with the goal of generating high returns. Private equity firms
typically raise funds from Limited Partners (LP) and form a pool of capital.
These firms subsequently identify promising investment opportunities, carry out
due diligence, and choose companies with growth potential. Once invested, they
work closely with the portfolio companies for the purpose of driving growth and
enhancing value. The ultimate goal would be to boost the company performance,
and hence its valuation. Private equity firms aim for an exit strategy like
selling the company or taking it public to generate profits for the investors.