Private equity investors aren’t always the most obvious source of funding for startups and small businesses. But they’re an increasingly important one, especially for entrepreneurs looking to scale beyond the startup phase. There comes a time when you need cash to grow–for new equipment, more inventory, and other resources to meet increased customer demand–and private equity has some of the deepest pockets.
Private equity enables companies to better exploit their potential. With the capital that private equity firms and their funds provide, they can drive their development and remain independent. In addition, private equity firms generally bring their expertise and excellent contacts to the portfolio companies, which they can employ to their advantage.
Below we have highlighted some of the advantages of private equity investments.
Long term investment can be beneficial for your company
Private equity houses typically invest in companies for a long period of time; this can be up to five, ten, or even twenty years. A long investment horizon can benefit a company in a number of ways. The main reason being that the investor will use their time wisely to create a careful strategy, seeking to minimize risk and preserve capital.
The patient approach that most private equity houses employ ensures that final value is extracted from the company at the right time; when the market or sector is at its strongest, at a time when investors or acquirers are drawn to the opportunity.
2. You can continue to run the company as normal without too much direct involvement from the investor
Although private equity investors tend to take ownership of most, or all, of your company’s shares, they don’t always take a direct role within the business, allowing you to remain within the company in a managerial role, with the added benefit of additional financing and expert guidance.
Many investors will help you to develop a clear strategy and stable growth plan at the offset of their investment period, then take a back seat in the actual delivery of the strategy as they allow you to manage your business on a day-to-day basis. Therefore, selling your business to a private equity firm doesn’t necessarily mean that you will be employed by someone else.
Even though selling a portion of your shares to private equity will leave you with less value at the beginning, within a few years your shares should be worth considerably more than the whole company was worth prior to private equity investment.
3. Private equity firms want your business to do well
The private equity investor has funds tied up within your business, meaning that they want and need your business to succeed in order to generate a return. This incentive will ensure that they are wholly committed to ensuring the success of your company over the course of the investment period.
4. Cash infusion
PE groups have deep pockets and can provide financial resources to fuel growth. These firms may provide the capital needed to renovate a facility, buy new equipment or launch a marketing effort.
5. Make valuable connections
Some private equity groups host annual mastermind events. Designed for CEOs and company leaders, these sessions are an opportunity to share best practices and hear emerging trends. The right PE firm is your path to a new community of peers and valuable business connections.
6. Proven returns.
Private equity firms are experts at creating value. One study from Boston Consulting Group showed that two-thirds of private equity deals resulted in at least 20 percent annual growth for the purchased company, with nearly half realizing 50 percent annual profits or better. For investors, private equity outperformed stocks by 4 percent in the U.S. over the last 20 years.
7. You don’t need a proven credit history
Some small business lenders have strict credit and financial history requirements, which can make the application process grueling with no guarantee that you’ll be approved. In comparison, private investors are typically more concerned with the money you can make them in the future than what you’ve done in the past and are therefore willing to take on more risk than most loan providers.
Final Thoughts
Financial capital is the driving force of most small businesses. While you may be tempted to take funding wherever you can find it, it’s important to weigh the costs and benefits of any major business decision before moving forward. If you don’t want to give up a portion of your earnings or be held accountable for your decisions, outside private equity investors likely aren’t right for your business. On the other hand, access to additional expertise may be exactly what your business needs to survive and prosper long-term.
Limitless Investment & Capital Private Equity Investment
If you are considering the sale of your company, or are simply interested in learning more about the many benefits of private equity investment, please feel free to get in touch with us today!