Knowledge & Insight

The Fundamentals of Private Equity

Wed 26 November 2014

Private equity refers to funding invested in a business in return for an equity stake in the company. It is an alternative to the traditional funding model of selling shares via the stock market, and differs from venture capital in that private equity is generally invested in mature businesses rather than start-ups and early-stage companies.

Why is private equity attractive to recipient businesses?

Inviting investment from a private equity firm brings a variety of benefits in addition to the injection of capital. Private equity investors play a far more active role than normal shareholders, frequently imposing a hands-on governance model that calls for disciplined management, clearly defined objectives and a robust decision-making process. Investors also bring a wealth of experience and expertise to the business, which can prove particularly valuable when a company is seeking to enter new markets, expand internationally or enter a phase of rapid growth. In short, private equity-backed companies generally adopt efficient and effective business practices, and it’s therefore no surprise that they frequently outperform similar, publicly-owned companies.

What’s in it for investors?

Why not simply invest in a company via the stock market? Private equity investors seek a higher return than is generally available to investors in blue chip stock.  So the attraction of private equity investments is partly about finding great value, but it’s also about having greater input into the business. Private equity investors work with the management of the business, providing input into strategy, invigorating sales and marketing, and driving operational improvements. Private equity investors add value beyond the essential finance, creating efficiencies, delivering improved profitability and driving higher growth.

A growing demand for private equity

Since the global financial crisis of 2007 and the subsequent credit crunch, businesses around the world have struggled to gain finance from banks and other traditional sources of funding. The private equity industry has responded to this change in market conditions and has, in part, risen to the challenge of meeting this demand for capital. But unlike the banks, that haven’t always demonstrated a good track-record of making prudent investment decisions, private equity firms are backed by investors’ own cash, which makes them far more likely to behave in a responsible fashion. Their investment decisions are based purely on risk and return, so companies that exhibit the potential to achieve high growth and deliver a strong return are well placed to benefit from private equity support, and to reward their investors accordingly.

The UK’s private equity industry

The UK is a global hub for the management of private equity investments. The sector has experienced strong growth over the past 25 years, and by providing robust corporate governance and driving innovation, private equity has a critical role to play in supporting and growing the wider UK economy.

Private equity executive search

The success of private equity firms in the UK has driven demand for skilled professionals with the expertise and experience to identify and exploit investment opportunities, and this has led to intense competition to recruit and retain such individuals. Stone Executive is a specialist private equity executive search firm with a team of seasoned private equity headhunters and venture capital headhunters. As a well-respected venture capital executive search firm, we have a strong track-record in venture capital executive recruitment and private equity executive recruitment.

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