When you’re starting a business, one of the biggest challenges is getting the money to grow. Many people think that they need to take on debt or sell a controlling equity position to fuel growth, but there’s another option: taking on growth or “non-control” equity from private investors. John Willding, a mergers and acquisitions attorney from Dallas, Texas, believes that this can be a great way for entrepreneurs to grow without sacrificing control over their company.
Private investors’ investment differs from traditional bank loans because it’s less restrictive about how much capital needs to be paid back and when. That means more money can go into running the business—and it doesn’t come with any interest payments attached, saving entrepreneurs time and hassle each month by not having repayments due. Private equity firms tend to invest in a control equity position, but that’s not always the case. Before taking on private equity, it’s important to know what they’re looking for and how much control you’re willing to give up.
Private equity typically invests in companies with proven earnings and an upward trajectory. Their background and expertise make them good at spotting deals that can scale general partners who manage daily operations and limited partners who provide the money. John Willding believes that this structure gives the limited partners some influence over investment decisions while protecting against conflicts of interest between both parties.
What is Private Equity
Private Equity (PE) is a structure that pools capital from institutional and high net worth investors to buy and build companies. Investors in PE funds are making bets on the future growth potential of these companies, hoping for growth and scale when they exit their investments either through IPO or sale to another company.
John Willding feels that what sets PE apart from traditional investors is hands on, highly-skill management. This gives them greater control over the management team and allows them to take more risks with their investment by providing more funding for expansion plans as needed.
The goal of private equity firms is twofold: first, to identify a platform company that they can build on and sell within five years and second, to make several bold-on acquisitions to grow EBITA. These goals require strict due diligence on potential investments before any money is moved or decisions are made.
Difference Between Company and Private Equity Investments
The biggest difference between public and private equity investment is public companies tend to by the entire company and private equity generally purchases a majority, but not all.
Private equity firms try to partner with founders, but they also push them in a constructive way to achieve milestones. John Willding feels that they allow entrepreneurs to focus more on operations while identifying acquisition targets or growth opportunities. This makes it easier for companies because there are fewer distractions, and investors have already come up with strategies for expansion.
One downside of taking PE funding is that deals usually involve giving up control over important decision-making processes to the investors. This can be a difficult pill to swallow for some entrepreneurs who see their businesses as their babies. Still, it’s important to remember that PE investors are not there to run the company—they’re there to help it grow sustainably.
Another difference between public companies and private equity firms is the types of companies that they invest in. Public companies typically invest in established companies with proven track records, while private equity firms invest in younger or earlier-stage companies with more growth potential.
How do Private Equity Firms Work?
A private equity firm forms a fund to raise capital from accredited individuals and institutional investors. The firm structures the fund to purchase ownership stakes in companies with maximum efficiency and limited tax exposure.
PE firms must carefully structure their funds to reflect potential investment opportunities to ensure the highest possible returns. This often involves setting up multiple sub-funds differentiated by geography, industry focus, or deal type (growth equity funds vs. buyout funds). There are layers of management fee structures and carry caps added on top depending on how much risk they want to assume for higher potential returns.
A lot goes into raising capital for a new fund. Still, successful private equity firms continue to raise larger dollars over time because of performance measured against benchmarks like the MSCI World Index or their closest competitors. It’s an incredibly competitive business, but it takes years of hard work and perseverance for this approach to bear fruit.