What is private equity?

If you are an entrepreneur, it is important that you know everything about financing sources, either to start or maintain your business, and one of the most basic concepts is Private capital, a topic that we are going to delve into next, if you want to know more about what it is and how it works, you just have to keep reading this post.

What is private equity?

It is considered as private capital, all the money that is invested directly in a company, either by private individuals or institutions. It is one of the most relevant investments for any company, despite being relatively new.

Generally, this money is a combination of principal and debts, which are combined with the money contributed by investors to gain greater control interests over the company or to increase the value of said investment.

Often times, investments made within private equity are destined for operating companies that are private or are not listed on the stock market.

How does private capital work?

It is normal for large and established companies to use their capital to invest or buy other smaller companies that they have excellent profitability, even if some of them are just starting out or not going through their best moment.

The main objective of private capital is get a company that can be improved through increased efficiency or by altering some operations and operations of the same, and later withdraw the investment once the company is profitable.

There are two types of companies that tend to attract investors in the private equity sector:

1. Troubled companies, which are publicly traded, but have been through a tough time and need a restructuring to be profitable again.
2. Private companies that do not sell shares on the stock market, such as the NASDAQ or the NYSE.

Characteristics of private capital

Private equity is easy to identify if the factors that characterize it are fully understood, here we explain them:

• Private origin: As they come from direct resources from families and companies, the general values ​​are specifically intended for those who invest.
• Generation of the business fabric: it is common for this type of capital to be present in various economies of a country, since leads to the creation of job opportunities while covering a large part of sectors economic.
• Investment source: through this capital different investments are generated and a great variety of business models are started.
• Debt relationship: it is normal that one of the sources of private financing is the assumption of debts, this means that the agents private companies of an enterprise receive credits or loans in order to use their funds in investments private.

Types of private equity

Although the list is not very long, there are several types of private equity And it is important to know them, since each one is designed to adapt to different business models:

1. Private equity

This is the name of the one where investors prefer to give capital to more mature companies that are already consolidated, even if they are small. This means that they prefer to invest in the full expansion of a business.

2. Venture Capital

It is responsible for providing an investment for companies that are in their initial phase, that is, they are in full development and show business potential within their sector.

3. Replacement

It is part of Private Equity but differs from it by substituting part of the stock that is currently in the company for another. This is quite common in family companies, where this is done for succession reasons.

4. For special situations

This type of private financing occurs mainly when economic situations occur where entrepreneurs find it difficult to remain viable, generally due to difficulty in controlling the loans and only debts are acquired that are impossible to pay for another half.

Benefits of private equity

The benefits that can be obtained from private capital are qualitative for all companies, and depend largely on the funds for which the resources are invested. Some of the advantages that we can mention are these:

• By capitalizing a large part of the business investment, it can be easily adjust, since it is subject to traditional sources of financing and therefore will have better financial access.
• It is a form of get valuation, especially if a professional in financial analysis decides to invest in your business, this in a way certifies the quality of your company and its potential.
• In case of getting an investor who has good connections, it is possible to get new alliances in short time, in addition to making important contacts in different areas, from clients to new funders.
• As there are several investors involved, it is normal for the transfer of knowledge to occur constantly, something positive especially for those who are starting a venture.
• Investor participations are temporary, generally in terms of 4 to 7 years approximately, where the invested funds bear sufficient fruit so that the company can be maintained for own account.

What types of companies are the most sought after in private equity?

Companies that are part of private equity generally have a series of characteristics so that investors can better identify them:

• Those where costs can be reduced, this includes efficiency.
• Those with hard assets that can be used as collateral for future debts.
• Those that have assets with the possibility of sale.
• Those that have good management.
• Those that are in proven, mature markets with high margins.
• Those that have no or very little debt, and that are also constant cash flows.

The Private capital It is a concept with the ability to cover all sets of capitals that belong to agents made up of areas private companies, it has many advantages for small or struggling businesses, and many large companies can also benefit from it.