Private equity is a source of investment capital from high net worth individuals and institutions for the purpose of investing and acquiring equity ownership in companies. Partners at private equity firms raise funds and manage these monies for the purpose of yielding favourable returns for their shareholder clients, typically with an investment horizon between four and seven years.
Private equity is capital invested into a company without going through an issue of publicly traded shares or bonds. The money comes from wealthy investors, be they individual high-net worth investors or venture capital funds – who seek early entry into a promising start-up in need of seed capital or a young firm seeking capital to expand.
Private equity investments are the most important funding source in the entrepreneurial marketplace. Private equity investments contribute to the funding of around 25 times the number of businesses the venture capitalists fund each year.
Private equity investments are usually derived from a high net-worth individual who represents an essential source of funding for early stage, high-risk ventures.
Private equity investors are private individuals who contribute their skills and money to start-up companies. Typically these private equity investors are successful entrepreneurs that offer their expertise, experience and contacts which are invaluable to your new venture. Private equity investors mainly focus on the personality of the business owners as well at the potential growth of the business. Although their expected rate of return is high, the payback terms are generally more laid back than traditional funding sources such as venture capitalist
Who Is A Private Equity Investor?
Below is a typical profile of a private equity investor:
- A private equity investor is someone who prefers to invest within one day of travel
- He is very well educated
- A private equity investor tends to invest collectively within a group of other private equity investors
- He usually invests within $10,000 – $500,000, averaging $230,000
- A private equity investor makes one investment every two years
Private equity investors have proven to be the single most important players in the entrepreneurial marketplace. Private capital investors fund thirty to forty times as many entrepreneurial companies as the entire venture capital industry and estimates put the total amount $20 – $60 billion annually
Advantages of Private Equity Investor
Many business owners have realized the major advantages to having a private equity investor for their company. The benefits include:
- It takes much less time to meet with and receive funds from a private equity investor than a typical venture capital firm
- The due diligence is substantially less involved and they typically expect a lower rate of return
- Usually, private equity investors take less control in the management of the business, setting of targets, and staffing
When approaching a private equity investor, have a good business plan in place and ready, so that you can represent your business effectively to the potential investors. Include in the planning details on how the money will be paid back and how the investors will be compensated. Having a good plan is extremely important to the overall success of your approval. Private equity investors reap huge rewards when their portfolio companies are large enough and successful enough to go public in an initial public offering.
Looking For A Private Equity Investor
Looking for investments from a private equity firm can often be a lengthy process depending on a variety of factors. The private equity firm will want to look at your business plan as well as take a good hard look at your investing proposition before they decide to invest. This can take anywhere from a month to one year. The average time one could have to wait is about 3 – 6 months. The wait period will have a lot to do with the quality and type of information that you provide to the private equity firm. Once you have prepared your business plan, you are ready to present it to several different private equity firms. Make sure that you choose only those private equity firms who have the same investment preferences as your own company. These preferences should include:
- The amount of equity you are looking for and the amount that they are willing to invest
- The location of your company and theirs
- The investment stage
- The industry sector you are involved in
You might need to consider sending a copy of the executive summary of your business plan only to the potential investor. This can save you time and money while at the same time it increases your chances of actually getting attention.
Private equity firms are bound by a code of conduct that requires them to treat any information you give them in a confidential manner. However, if you are concerned about any confidentiality issues, you should be sure to see if the potential private equity investor you are communicating with has any major conflicts of interest. This can include any investments they have with any of your competitors. You also have the option of omitting any data that is extremely confidential until that time as the private equity investor shows interest in investing in your company. Consider sending a letter of confidentiality along with your business plan or the executive summary portion of your business plan. If you want to send along a letter of confidentiality you can have your lawyer help you draw one up to meet your own needs. Ask the private equity investor to sign the letter of confidentiality before you hand over your business plan.
Within a week of approaching a private equity firm you should receive some indication of whether they are interested or not. You might get a no, or the private equity investor might ask you for more information. As well, the private equity investor might request a meeting with you to talk with you face to face. If you get a flat no, you can try to find out why you were refused so that you can make revisions to your business plan for future potential private equity investor. Try to strengthen your plan before approaching other private equity firms.