Tag Archives: private equity

Investing In Private Companies

Private Equity Investing

With the ease of access to information, today it is much easier to gain the financial knowledge required for sound investments. Gone are the days when investment are only made through fancy brick, and mortar institutions and only the investment in public ventures are considered a safe and reliable investment option.

Nowadays it is equally safe and profitable to invest in a private company as it used to be in public enterprises.

With arising financial pressure to perform, complications and scandals relevant to public companies, some investors are of the view that private companies are more genuine and honest.

But before getting into the complexities, it is essential to know about the types of private companies today’s investors are participating.

Types of Private Companies

The type of a private company is defined by its development stage. First of all, comes the stage of angel investing or angel firm. At this point in time, the business is just starting. This stage is known as angel investing because the entrepreneur has arranged funds from his resources. The second stage is venture capital, at this point, it is assumed that business has long-term potential to some extent. Due to this fact, a relatively experienced group of people offer capital for the business along with knowledge regarding the operations and management of the business.

The next stage is known as the mezzanine stage, at this stage the business is introduced to the dynamics of the equity and debt and in case the company defaults on its interest payments, then it will also turn into equity.

Investing in Private Companies

While investing in a company, it is necessary to consider the stage or type of the private company, since each stage offers a different set of risks and rewards. Therefore, the investor should invest according to his risk and reward appetite.

Investing in an angel firm offers the highest amount of reward, but it also involves the greatest amount of risk. At this stage, the business is just getting started, and there is a substantial amount of risk it will not be successful, but if does, it can offer the highest possible amount of profit for the investor.

Many considerations are taken into account by the investor like the direction of that specific industry, management, and use of funds.

Now considering the second stage, that is venture capital stage. At this point, there are fewer chances that the business will fail because now a higher amount of capital and business knowledge is involved. This is also the relatively common option available for investing which also has the potential of reaping higher level of profits.

When the business is at the mezzanine stage, usually financial institutions jump in and support the business because at this level business is established to a great extent. Therefore, financial institutions see the window of opportunity and try to benefit from that. Though individual investors can also invest at this stage, businesses prefer financial institutions because they can sometimes offer a higher level of flexibility and/or better terms and conditions.

At the last stage, a company is equivalent to a public company. All of its functions are same as of a public company. This stage offers the least amount of risk, but this factor also reduces the level of rewards as well. But still, this is a great option for investment purposes.

Benefits of Investing in a Private Company

There are several benefits of investing in a private company, some of them are highlighted as follows:

In the past, it was believed that public enterprises perform better than private companies. This fact can be negated with the help of some recent data;


This indicates that investing in private equity is a better bet compared to the investment made in a same publically traded company.

The trend of private corporations performing better than the public companies is more pronounced when considering the investment in lower and middle market private equity as indicated below:

lower and middle market private equity

This change of trend can be attributed to the fact that private companies are relatively young in nature and they are growing. Therefore, there are things that they have yet to explore or incorporate in their business. This allows them to generate the higher level of returns with the higher level of risk involved as well.

Secondly, private companies are more than likely to invest towards their growth and are more sensitive to the investment opportunity coming their way. These dynamics of the private company make them capable of providing a highest possible return on the investment.

Thirdly, more than likely a private company is a tightly run business. This kind of structure is very successful in the business arena because they have a perspective that is long-term. When business management has a clear and concise long-term plan then it is more than likely, that such company will outperform its other counterparts which are in public sector.

Doing what’s easy is not always the best direction with investment money. Nowadays investing in a private company is easy, but still not as easy as investing in a public company.

However, it is quickly becoming common practice by many high net worth investors to add private companies into their investment portfolio with the help of pooled investment options available in the market.

Investment in private companies through this method allows the investor to reap the same kind of benefits that are being offered by a mutual fund based on the public companies. Under this method, investors receive units, which is equivalent to owning shares of a publically traded company. Then using these units investors carry out their investment activities. In most of the cases, these pooled investment instruments are focused towards the companies which are in their earliest developmental stages. But there is no limitation to that; there are also well-established private companies are available for the investors who are risk-averse.

When investing in a private company, it provides the investor a certain kind of control and can give authority over the firm. This is referred as the control investing. Control investing provides the investor with the substantial amount of control that can be used for influencing management style, a way of doing business, operations of the business and many other aspects. This provides a better level of accountability in the business along with the value creation at the optimal level. There are some cases where control investing allows the investor even to have the authority to remove or change the CEO and management.

While conducting business, the risk mitigation factor is usually undervalued. This aspect is left to be on the need basis; this implies that its risk should be dealt with when it arises. This is an ultimate strategy for business failure because when risk arises, it is usually too late to deal with. The optimum strategy is to mitigate the risk before it even arises and there should be a concise and definite plan about how to deal with a risk when it arises. When the investors invest, then this aspect of the business was catered by them to a great extent. This is because, when investors’ money is at stake, they are on the lookout for the risk. They sense it before it arises and try to avoid it at all the possible cost. This phenomenon becomes all the more efficient and effective if the investment made by the investors provide them some kind of control and authority over the business. Therefore, it is also in the interest of the private companies to have some external investors because this allows them to run their business efficiently and effectively.

Things to Consider

There are certain things that any investor should keep in mind before investing in a private company.

First, private companies are relatively not liquid compared to public companies. Also, the investment horizon involved in investment with private companies is long-term. Therefore it is not possible for the investor to cash out of the business when he wants, but they have to wait for such event to take place. For example when a company goes public or when it buys its private shareholders or worst case scenario when another firm is purchasing the business. Moreover, an investor should also keep in mind that private companies are valued like any other security on a regular basis. This is to determine either the company is undervalued, overvalued or fairly valued.

All of these facts make investing in private enterprises a highly profitable game. Investors that have the financial muscle to deal with the risky and illiquid nature of a private growing company.

Follow on LinkedIn Rodney Gray





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