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A guide to private equity funds

21 Sept 2021

Private equity is an alternative form of private financing outside of the public markets, where funds and investors directly invest in companies or are involved in buyouts of companies. Usually, the investment funds are made to established businesses or more traditional industries in exchange for equity, or percentage of ownership. We explore private equity as a finance option and why so many businesses choose this kind of capital.

A guide to private equity for business

All you need to know about private equity funds

Private equity is a finance product that makes up a more complex part of the financial landscape known as the private markets. It’s an alternative to property finance or venture capital for investors although they’re not as easy to access compared to stocks in the public sector. 

Private equity firms make money through other forms of structured debt such as management buy-outs or acquisitions as well as performance fees from investors in a fund. Management buy-outs are when a company’s existing management team buys the assets and general operations of the business they already work in. A buyout can be an easier way for a business to structure its finance as the management team will understand existing processes and the financial state of the business. Acquisition finance is similar to management buyout as it’s a form of capital that’s solely for buying other businesses.

What is a private equity fund?

A private equity fund is created when private equity investors raise capital to form a fund to invest in a company. They typically raise the funds from other limited partners and once they’ve got the funds they were looking for, they close the private equity fund and invest it. Just like other kinds of funding options, private equity funds offer businesses the investment for growth and development. 

The main difference between private equity and other financial products is that it’s made up of funds and investors so when a business receives an equity fund, it will have limited partners (LPs) attached to it who own around 99% of the shares and have limited liability. The other 1% of shares will be owned by the general partners (GPs) who have full liability for the equity funds.

Why do businesses use equity funds?

Private equity funds can be used for a range of things to improve a business such as new technology, bigger teams, even make acquisitions or simply help the balance sheet. There are no set rules for how the funds can be used to help a business.

Private equity allows businesses to have access to hands-on investors who can help re-evaluate all areas of your business with the help of their expertise

Private equity funds vs hedge funds

The main difference between private equity funds and hedge funds is that private equity funds focus on private companies, whereas hedge funds typically operate in the public sector. The fund structure and investment targets are very different for hedge funds as they’re targeting very different markets, private and public but both types of funds have to have accredited investors.

Private equity and structured debt

Some forms of structured debt such as acquisitions or MBO’s are similar to private equity in that they raise capital from the existing business, whereas private equity comes from external investors with an interest in improving business performance. 

Another difference between these types of funding is where capital comes from, as PE funds have accredited limited partners and structured debt is often raised within an existing business or formed to fit alongside other funding.

Companies looking for funding from private equity typically consider a company’s portfolio and whether they have experience with investing in similar industries or businesses. Whereas structured finance options such as mezzanine and acquisition finance are designed to fit alongside other kinds of structured funding options.

If you’d like to understand more about how structured debt could be a good finance option for your business, why not speak to our dedicated team of Business Finance Experts today.

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