Private Equity (PE) investors purchase shares in privately-held businesses that increase in value so that they can be sold for a profit. There is a wide range of ways to achieve this, with some investors investing over a short period in fast-growth businesses, and some over a longer period. Firms can have a specialism or multiple funds with particular specialisms which can be in the types of investment (e.g. growth partners, buyouts, etc.) and the sectors they invest in (e.g. consumer, tech, impact, etc.). Importantly, there is also a range of deal styles starting with majority share, minority share, or full buy-out of the company and then more nuanced aspects like money out for existing shareholders.
Technically all private investment in a company’s shares through a fund is “private equity.” Usually though, Private Equity is used to mean a more specific part of the market.
Under this broad definition, venture capital (VC) is a type of Private Equity, and Angels pooling their money to invest together are also a type of Private Equity. The main difference between VC, Angels, and a Private Equity firm is the stage of business they invest in. VC and Angels generally invest in early-stage start-ups and entrepreneurs with a fast growth rate and a short investment term.
A Private Equity firm usually invests in more mature businesses, which means a larger cheque size and an investment term of more than five years. They are well-versed in the nuances of business and will want to understand yours well before they commit. There will be an expectation of financial transparency and data disclosure. This lengthier relationship also allows for flexibility, which means that PE can work alongside existing equity investors and debt and explore a range of options for exit to find the best suited to the business.
If the PE firm takes a significant stake in the business, even if a minority, they will take one or several board seats. These will usually be filled by members of the investment team who have a relationship with the company and experience in the sector and are known as NEDs, Non-Executive Directors. Depending on the type of firm and its investment style, this board seat can be purely observational or an active participant in the business.
Because of all these varying ways that Private Equity can work, it’s important to research before you approach a PE firm. There’s no use in meeting a tech investor if you’re a consumer business. But also, don’t be afraid to reach out and ask questions. Investing in businesses like yours is how PE makes money, so if something isn’t clear it is in their interest to help you understand. Even if you’re not at the right stage for a PE firm, that doesn’t mean you shouldn’t get in touch, as they take longer to invest they often meet early stage businesses and keep in touch and offer advice throughout their growth.