Review private equity firm BGF
What is a private equity firm and how do they operate, according to BGF?
Private equity (PE) is a type of corporate funding that a variety of companies employ to help them develop. With an unprecedented volume of deal activity in the PE sector in 2021, private equity funding is becoming increasingly popular.
But what are the characteristics of private equity, how do private equity companies operate, and what are the benefits and drawbacks of PE vs other types of funding?
What is private equity?
Private equity is a type of financing in which a private equity firm invests money in a company in exchange for a share of the company's equity or ownership. Although most private equity investments are majority investments, in which the investor purchases a controlling stake of more than 50%, certain PE firms also conduct minority investments.
When the conditions are correct, private equity can be tremendously profitable to both parties. Businesses can get the funding and skills they need to move fast to the next stage of their development, while PE investors can make a big profit when they exit the transaction.
Private equity, on the other hand, is not suited for every company, and with more alternative kinds of financing now available, many companies are seeking for funding arrangements that allow them greater control.
What do private equity firms do?
Companies in charge of substantial investment funds make private equity investments. A PE firm's core activities are often twofold: raising capital and making investments in high-potential private enterprises.
Raising capital
The majority of money for private equity businesses comes from institutional investors. Pension funds, sovereign wealth funds, and insurance firms are just a few examples. (Some private equity firms also raised funds from people, usually high-net-worth individuals.)
Limited partners are the investors in a private equity firm who pay management fees to the firm. They provide the majority of cash for a firm's fundraising goal and control the majority of shares in the investment business, but they only take on a small amount of risk in their investments. The general partners possess the remaining shares. Individuals at the firm who do not contribute considerable funds but are actively involved in raising cash and making investments, as well as taking on additional responsibilities.
Making investments
Private equity firms invest in privately held businesses with great development potential. A pure swap – cash in return for equity – may be all that is required in a PE agreement, just as it is in a standard venture capital deal. PE firms, on the other hand, are notorious for pursuing a different type of deal called a leveraged buyout.
In a leveraged buyout, a private equity firm borrows a considerable sum of money to cover the acquisition costs. The assets of the target company may be utilized as collateral for the loans. A private equity investment tries to increase a company's profitability while also assisting in the reduction of debt during the length of the partnership. Leveraged buyouts, on the other hand, will not be suitable for all businesses.
The majority of private equity investments are short- to medium-term in nature. Acquisitions, new product development, and foreign growth are all ways that can help a firm grow swiftly. PE firms often strive to realize the value of their assets very fast because they are required to provide returns to their limited partners within a set term. This might vary, but a three-year investment period is not uncommon.
Most PE investors serve in a non-executive capacity, assisting with the execution of the business's growth strategy and the development of a stronger leadership team.
What are the types of private equity investments?
Businesses of all sizes can benefit from private equity acquisitions, which are frequent throughout the industry.
Early-stage private equity
Early-stage private equity agreements, which are frequently associated with venture capital, generally focus on start-up companies with high potential to grow from a modest base. Early-stage PE finance normally attempts to construct a business that has already acquired a large user base or began to make regular income, whereas venture capital companies tend to pursue enterprises with huge ideas that may be pre-revenue.
Large private equity deals
Private equity finance is also available to large businesses. In reality, it appears that large private equity deals are becoming more typical. PE may be appropriate for large companies with annual revenues of £100 million or more for a variety of reasons. They frequently revolve around the specialized knowledge that a private equity company may bring to the table when developing new models and goods, hence improving the brand's value. Another method is to make acquisitions.
Mid-market private equity
The majority of private equity agreements in the UK are done in the middle of the market. The size of the deal (usually between £10m and £300m) and the size of the company receiving investment (often between £5m and £100m) define mid-market private equity.
Companies seeking private equity in the middle market frequently pursue development through mergers and acquisitions, expansion into new markets, and leadership team strengthening, among other techniques.
Is private equity the best form of funding for my business?
Private equity can be revolutionary for companies looking to expand quickly, but it is not for everyone. A company should think about its growth ambitions while also understanding the PE investor's motivations in terms of investment returns and timetable.
Then there's the issue of command. In most PE deals, the investor receives a majority stock stake. Some entrepreneurs may be hesitant to do so, in which case a minority investment may be a better option.
A company should also think about what kind of investment period is best for them. In most cases, a private equity firm will wish to sell its stake within a few years. If a company wants to borrow money for a longer period of time, it can do it with the help of a bank.
Patient capital from BGF
We have a unique position in the UK and Ireland's investment landscape at BGF. We never seek to acquire complete control of the businesses we invest in, and we always make minority investments in new businesses. We do not impose arbitrary timetables or exit dates on any new investment as a patient capital investor, nor do we impose drag-along rights on any new investment. We support our portfolio firms throughout an investment period that might range from months to years, allowing them to expand at their own pace.
We've funded over 450 British and Irish businesses over the last decade, assisting them in achieving their ambitious growth goals. Learn more about how we can help you take your company to the next level.
The information in this article is for educational and recreational purposes only. It does not constitute investment advice and should not be used to make any financial decisions. Independent counsel should always be obtained to determine whether a transaction is appropriate for your personal and financial situation.
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