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What Is Private Equity & How Does It Work?

A private equity buyer is a firm that pools money from many investors to buy private companies, rather than public ones. These acquisitions are made outside of the stock market through direct purchases or mergers.

The goal of a private equity buyer is not necessarily to maximise short-term returns, but rather to minimise risk and improve the value of a company over time. In order to accomplish this, PE firms often have more freedom than other companies in structuring their deals. Therefore, they can negotiate more favourable terms for themselves such as guarantees to cover any future indemnities and other forms of insurance.

If you are looking to buy a business, you don’t need to incorporate a private equity firm to do it. You can simply buy the business, either through buying its assets or shares. But if you would like to make a similar kind of investment, and receive expert advice too, then consider consulting with a private equity firm instead.


Where Do UK Private Equity Firms Get Their Money?

A private equity firm’s ability to buy businesses is based on its own capital, which it raises from the individuals and institutions that invest in their funds.

This capital consists of two main types.

The first is referred to as committed capital or permanent equity, which are the funds that have been raised but not yet invested by the PE firm. The second form of capital comes from realised profits within a fund’s portfolio. This money can either be recycled into new acquisitions through a secondary purchase, or it can be returned to investors as a dividend.


Why Do Private Equity Funds Buy Businesses?

A private equity buyer will generally purchase a business when it believes that there is value in its operations and management team, and that the company can be improved and eventually sold at a higher price; or, that it will continue consistently making money and eventually recoup the cost it was bought for.

The underlying point is that PE firms are an alternative to the stock market. They offer more regular or higher investment potential than stock for their wealthy clients.


How Businesses Attract Private Equity

The acquisition of a privately-held business by an outside party is commonly referred to as a buyout. The best way for a company owner to attract private equity interest is to ensure the company has sound financials, and that it has potential for growth in the future. In all ways, the company must be made as simple and profitable an acquisition as possible; business owners must:

  • Audit their financials
  • Win a broader customer base/more clients
  • Fill obvious gaps in their team
  • Enter new and profitable markets
  • Protect their intellectual property rights if necessary

Other than that, it’s a game of networking, recognition, and marketing.


Private Equity vs. Venture Capital

Strictly speaking, the two aren’t that different. Venture capital is by definition a form of private equity. But they aren’t the exact same thing.

Venture capitalists are designed to help finance new, unproven organisations with high growth potential, while private equity investors usually provide funding for more established businesses that they believe they can improve and resell at a profit.

A venture capitalist will usually provide smaller amounts of equity capital in exchange for a claim to the business’s future profits, while private equity investors tend to use large cash sums as leverage to gain significant control over the company.


Private Equity vs. Buying a Business

Investing in a private company through a PE firm is very different from simply buying a business outright. The terms of a deal, and the expectations within it, are very important. The purchase of a company can be much more complex than just paying money for assets. Key differences include:

Speed: A private equity firm’s investment will usually be completed far more quickly than a purchase of a company, with less need for additional financing.

Control: As an investor through a private equity firm, you do not control the businesses that are bought. When you buy a business outright, you can do what you want with it.

Return on Investment: The return you’ll receive on investment in a private equity firm will be less than if you buy an entire business. However, the risk of losing money is also lower.

As you can imagine, for some people, private equity might be the better option; for others, buying the business outright.


Contact Chelsea Corporate Today

At Chelsea Corporate, we help people buy businesses. We identify off-market opportunities, vet them, and present them to our clients–making the process quicker and easier than ever. We can talk with the seller on your behalf, offer advice based on our years of experience, and give you everything you need to thrive when buying a new business.

So, why not consider contacting us today, either through our contact form or over the phone? We’re looking forward to hearing from you!