Private equity represents funds secured or amassed from investors to buy stakes in companies.
Theoretically, private equity is venture capital. But the former is usually associated with money trolling for mature, income-generating firms that need a revamp to become financially worthy.
Meanwhile, venture capital focuses on younger companies, mostly involved in sophisticated tech. On the other hand, private equity is more appealing to recognized businesses, including franchises, service businesses, and manufacturing companies.
How Private Equity Works
Sometimes a private equity company will purchase another entity completely. The founder may opt to remain behind to run the business— or not.
Other purchases may include buying out the founder, providing capital, cashing out current investors, or providing operating capital.
Private equity is also linked to a buyout where a company seeks more funds to improve its purchasing power by using assets as collateral.
Are the initial investors asking for their payday? Is the founder grumpy? Or perhaps the business is losing its mojo, and it demands some urgent funds for an overhaul. Private equity is the best solution.
Moreover, private equity funds may tag along with new personnel or perhaps fresh ideas that may give an entity a second wind.
Younger entities don’t do well with the private equity investment strategy. Keep in mind also that private equity’s primary goal is to make a firm worth more than it initially was to increase revenue for investors.