Private Equity

What is private equity?

Private equity (PE) is a form of finance that is deployed into private companies with the aim of supporting growth. Typically sourced from specialist private equity firms, fund managers, institutional investors, or family offices, private equity is used to acquire equity stakes in a business, often with a view to improving performance and ultimately realising a return through a sale or flotation.

Bridging the funding gap

Private equity plays an important role in helping to fill a persistent funding gap left by traditional sources of finance, such as bank lending, whose funding parameters have become increasingly constrained due to stricter regulatory requirements and a reduced risk appetite.

Types of transactions

Private equity investment enables entrepreneurial businesses to expand rapidly, but every private equity transaction is different, and its structure will depend on the business’s strategy and objectives. Transaction types can include management buyouts (MBOs), growth capital, buy-and-build projects, equity value release, and pre-IPO financing.

Active investment approach

A distinguishing feature of private equity is its active approach. Unlike public market investors, who typically take a passive, minority position, private equity firms often acquire a significant or controlling stake and play a hands-on role in shaping the company’s future. It is this ability to drive value creation and improvements within portfolio companies that helps drive private equity’s higher rates of return. Private equity investment firms are adept at identifying where a business has been passively managed and is likely underperforming, or where it is undervalued because its growth potential has not been fully recognised.

Risk profile

From an investor’s point of view, private equity is an alternative asset class, providing access to private markets, which carry a higher risk profile compared to traditional public equities. Unlike public equity, where shares are traded freely on open markets, private equity is illiquid and held for the long term.

This longer-term approach can be advantageous to businesses involved in emerging technologies, which require significant time and capital to develop, commercialise, and scale. Unlike public firms, which often face short-term pressures to demonstrate quarterly earnings at the expense of R&D, private businesses can invest strategically in high-risk, high-reward projects.

However, for investors who invest in private equity through a fund structure or deal-by-deal via a specialist investment manager, this does translate to longer hold periods and reduced liquidity. To compensate, private equity has the potential to deliver greater returns and provides significant diversification benefits due to its non-correlation to listed markets, offering a buffer against stock market fluctuations or the broader global economy's whims.