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Private equity is the equity financing of unquoted companies by investing money in the form of shares or shares and shareholder loans. These companies are not quoted on public stock markets which is why it is called private equity. In general, private equity firms invest in venture capital (early stage) or private equity (buy-out/growth) opportunities.
Venture capital funds invest in companies at an early stage in their development often with little or no track record. In contrast, private equity funds invest in buy-out/growth opportunities of more mature businesses, such as established family owned businesses.
How does it work?
The benefits that private equity brings to a company primarily centres around the management team becoming owners in the business. This upgrading of an employee mentality to a sense of ownership creates the motivation, drive and commitment to take the business to the next level.
For a family-owned business, the shift to a more corporate structure with a board of non-executives; the increased credibility with banks, suppliers, customers, etc; the availability of broader support networks; and the courage from having a financial backer; also contribute to the improved dynamics of a private equity backed company. See the attached video on one of Enterprise Equity’s investments: Chambers Coach Hire Limited.
What is its economic impact?
According to the British Private Equity and Venture Capital Association Economic Impact of Private Equity in the UK 2007 private equity creates growth and wealth. In the 5 years to 2006/07:
- jobs in private equity backed companies have grown faster than jobs in FTSE 100 and FTSE 250 companies
- sales in private equity backed companies have grown faster than FTSE 100 and FTSE 250 companies.
- exports from private equity backed companies have grown faster than the national average.
- investment in private equity backed companies has grown much faster than the national average.
For management teams, a buyout provides the opportunity to become owners as well as managers of the business. It can be a tax efficient form of wealth creation and allows participants to continue to drive the business as an independent entity.
Enterprise Equity’s involvement can help a business to grow faster through organic growth or by acquisition.
For further information, please feel free to contact us. A Confidentiality Letter is available for download at the top of this page.