Private Equity
Private Equity (PE) is the provision of long-term equity capital by investors to companies that are not publicly traded on a stock exchange. Private Equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company’s balance sheet. It can also resolve ownership and management issues, such as succession in family-owned companies, or the buy-out/buy-in of a business by experienced managers.
Venture Capital
Venture Capital (VC) is a subset of Private Equity that targets start-up and recently formed companies in need of capital to expand their business, referring to equity investments made for the launch, early development, or expansion of a business.
Facts About Private Equity And Venture Capital
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of CEE divestment value carried out in Romania: fourth place in value of exit deals among CEE€0 million
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exited backed by private equity and venture capitalFrequently Asked Questions
The investment process, from the initial busines’ assessment to signing the transaction’s documents/realizing the initial investment, usually takes three to six months.
Initial Valuation
To understand and evaluate the merits of a potential investment, the company/potential investee must offer the PE/VC fund information allowing them to express interest:description of the company’s business/products/services etc, business plan, financial statements (audited, if available), allowing on-site visits and meetings with the management. The amount of information confidentially exchanged depends on the stage of development for each company and generates a roadmap for driving the company to the next level.
Initial Investment Proposal
Providing a VC/PE fund is interested in a certain company, it will formulate an initial proposal to the potential investee, containing the general terms and structure of the porposed investment.
Due Diligence
After the initial investment proposal is accepted (by signing a Term Sheet/Memorandum of understanding that details the main terms and structure of the potential investment), a due diligence process is completed, aiming a deeper understanding and validation of the business’ assumptions/plan. The due diligence (financial, legal, technical, commercial etc) may be conducted by the Fund’s professionals or by third parties employed in this respect.
Final Negotiation and Completio-after the Fund’s assessment and due diligence investigations, providing the results are satisfactory, the Fund usually makes a final proposal that contains the proposed prive/valuation of the business (and consequently the percentage stake in the company), the envisaged transaction structure as well as roles & major rights and obligations. Upon acceptance of this proposal, legal documents are prepared and signed. A shareholders’ agreement will mention all rightsand obligations of both parties covering the terms of investment, voting rights, dividend policy, rights and obligations regarding a future sale of the company/Fund’s participation etc.
Monitoring
The PE/VC representatives on the company’s (non-executive) board will be able to participate actively on all major decisions. They will also monitor the Fund’s investment through regular reviews of financials and operations with management.
Exit
PE/VC Funds usually exit the investment within 3-5 years after the initial investment date, provided that the economic cycle is not adverse. There is a clear agreement with the other shareholders that PE/VC Fund requires an exit and the exit strategy is agreed before the investment is made.
Both VC and PE firms both raise capital from professional investors (limited partners) in order to invest in privately owned companies, aiming to increase the value of the businesses they invest in.
There are several diferentiators between PE and VC:
- type of the company;
- level of capital invested;
- the share of equity obtained in the respective company/investee
- the moment of initial investment, with regard to the investee/company’s lifecycle
Private Equity funds invest in more mature companies/established businesses operating in traditional industries (often take a majority stake / 50%+ ownership) with the aim of streamlining operations and driving business growth.. In contrast, Venture Capital funds invest in start-ups and companies at an early stage of development, often tech-companies that show potential for long-term growth (in most of the cases in exchange of minority stakes/<50% ownership)..
VC investments are usually lower (< € 1 million), while PE funds mostly invest larger amounts into one company (> € 5 million).
The choice between listing and Private Equity depends primarily on the entrepreneur and what he seeks to achieve through the funding attracted. Also, an IPO choice may be limited by the liquidity of the relevant stock exchange for the respective company/region. The main differentiating factor is that by listing on the stock exchange a company attracts passive investors, while the Private Equity investor is an active one. A company that raises money through an initial public offer (IPO) must subsequently follow a rigorous reporting program on their business’ performance , but, on the other hand, shareholders are not involved in business decisions, except when their vote is required by law.
While there are several sources of financing available to growing businesses, Private Equity is unique in the flexibility and management expertise it offers to investee companies. Private Equity firms are in the business of both helping fledgling companies to grow and managing struggling companies back to corporate health. Therefore, Private Equity fund managers, through these experiences, develop expertise in all areas of corporate management: business strategy, legal affairs, human resources, and technology to name a few. Investee companies can and do leverage this extensive expertise as fund managers share and apply their knowledge to every company in which they make an investment.
Moreover, Private Equity investors are committed to providing this assistance over the long term: investments in companies are generally held for a period of three to five years. Private Equity financing has the advantages of public equity financing (there is no direct obligation to pay dividends to shareholders) but comes without the pitfalls. Public shareholders often demand immediate results. Therefore, an PE fund is a more patient investor than capital market investors, who have the ability to penalize companies for poor results or depending on the general market context.
Private Equity managers raise investment funds from a range of sources, including institutional investors like pension funds, insurance groups and sovereign wealth funds, local authority pension schemes, as well as private investors.
One of the reasons why Private Equity investments can be more profitable for institutional investors than investments in listed companies is that this type of investment is not liquid. Studies show that precisely because of illiquidity, the return offered by Private Equity investments is higher than the profits earned on the stock market. This is because the Private Equity investor does not have to sell in the middle of the recession and can take advantage of different stages of the business cycle. In case of a recession, similar to the one we are facing these days, Private Equity investors can build value until the economy recovers and can plan an exit only when the market is at its peak. When the time is right, Private Equity managers sell their funds’ ownership interests. This can result in healthy returns for Europe’s leading pension funds and insurers, benefitting the millions of European citizens who depend on these institutions for their retirements.
A company that pursues a trajectory of disruptive growth, radical innovation, international expansion, a company that in addition to capital is also looking for value add or a specific skill set to achieve its ambition is suitable for a Private Equity fund.
Private Equity fits like a glove to an entrepreneur who needs partners to consult with, in order to grow his business. PE is a perfect option for those looking for an additional set of skills, know-how, ambition and who want to be part of a close partnership.
Private Equity funds have a growing and consequential influence on social and environmental outcomes through its own activities and of the portfolio companies, leading to substantial improvements in market and company operating performance, productivity including increased physical investment, new business creation, business recovery and survival and the sustainability of employment.
The development of companies with the aid of PE capital has been a key driver of economic growth and, by extension, job creation in Europe. PE funds deliver positive and sustainable impact by creating a workforce comprised of all genders, ethnicities, ages and sexual orientations – up to 5,600 firms are likely to be created as a result of private equity activity in Europe each year.
Private equity firms foster innovation by allocating more funds to research and development for new products and processes in the investee companies and by supporting start-up young firms, which tend to be more innovative than the average firm. PE is associated with improved management and better resource utilization, and therefore contributes to increase business productivity and thus economic growth as well via enhanced competitiveness by making the investee companies more productive and via external trade by supporting export-oriented businesses or supporting the expansion of established local businesses into foreign markets.