About Private Equity
An entrepreneur seeking to start or expand a business must engage in the difficult task of raising money, usually in large quantities. Often this is the most challenging endeavor a small but ultimately promising business venture will face. Private equity funds provide these businesses with the funding necessary to facilitate growth. Industry leaders like Intel, Apple, Skype, and Burger King, for example, at one point in their histories all benefitted from private equity financing. Moreover, in South Eastern Europe, firms such as Continental Hotels (Romania), Devin (Bulgaria), Total Leasing (Moldova), and Serbia Broadband (Serbia) have all developed into regional leaders in their respective markets with the aid of private equity funding. The effects of private equity financing, however, are not limited to individual firms. In fact, the development of companies with the aid of private equity capital has been a key driver of economic growth and, by extension, job creation in Europe. For example, from 2000-2004 private equity financed companies in Europe generated 1 million new jobs.1Specifically, private equity is the provision of long term equity capital by investors to companies that are not publicly traded on a stock exchange. Venture capital is a subset of private equity that targets start-up and recently formed companies in need of capital to expand their business.
While there are several sources of financing available to growing businesses, private equity is unique in the flexibility and management expertise it offers to investee companies. Private equity firms are in the business of both helping fledgling companies to grow and managing struggling companies back to corporate health. Therefore, private equity fund managers, through these experiences, develop expertise in all areas of corporate management: business strategy, legal affairs, human resources, and technology to name a few. Investee companies can and do leverage this extensive expertise as fund managers share and apply their knowledge to every company in which they make an investment. Moreover, private equity investors are committed to providing this assistance over the long term: investments in companies are generally held for a period of three to eight years. Finally, private equity financing has the advantages of public equity financing (there is no direct obligation to pay dividends to shareholders) but comes without the pitfalls. Public shareholders often demand immediate results. While actions can be taken to maximize profits in the short term, these actions are often detrimental to the firm’s long term health. Since private equity investments are made for a number of years, management can take the sort of farsighted approach that will be most beneficial to the firm in the long term.
1. Source: EVCA survey “Employment Contribution of Private Equity and Venture Capital in Europe”, November 2005