Private Equity investments

Private equity investments refer to investments in companies that are not quoted on the stock exchange

Private equity investments refer to investments in companies that are not quoted on the stock exchange. They are usually categorized as an alternative investment class.

In order words, rather than invest in companies that are quoted on the stock exchange, private equity investors buy equity shares into private companies by pulling funds together to buy and restructure these private companies.

Investments as these are primarily from institutional investors who are willing and also have the capacity to set aside material sums of money (millions or even billions of naira) alongside other investors for a long period of time.

When raising capital, as a result of the huge size, P.E firms/ investors are known to secure the help of big financial firms or external financial institutions (LPs) in addition to their own capital.

While venture capital investments opt for investments in start-ups, P.E investments, as they are popularly called, are made into fast-growing businesses or businesses who require funding to move past a stage in their lifecycle.

They can also help in expanding the working capital requirements of these organizations so as to help strengthen the balance sheet of the portfolio companies, be part of leveraged buyouts of public companies which leads to the delisting of public equity, and so on.

For example, the company might be required to move past a tough period or might need funding for expansion or the introduction of a new technology. If it already sounds risky, it is because it is! The investor certainly takes on more risk in the process.

These kinds of investments are usually organized as limited partnerships and unlike the stock market where you invest and wait to see the results, the private equity investor is part of the process of generating revenue.

Investors also have the opportunity to negotiate favorable terms at the time of the investment, putting them in a good position to make major money if the business succeeds.

The primary objective of a P.E firm with a company while investing is to make the business worth a lot more than it was before for the benefit of all shareholders or investors. Which is pretty much what you do as an investor in publically traded stocks.

However, as opposed to just receiving little dividends and increasing the value of the stake you have in the company, the stakes are much higher with private equity. For this reason, the P.E investor’s goal is either to have a distressed company turnaround or at least be able to liquidate ownership when the company’s potential has been proven.

The process in use by most P.E firms includes raising money, sourcing for and closing deals to acquire or restructure companies, improving the operations (such as cutting costs, ensuring management efficiency and also coming up with new ideas), and then selling the portfolio companies or their shares in the company at a profit.

Other private equity strategies include buying out the founders, providing expansion capital or providing recapitalization for a struggling business.

Written by Lawretta Egba.