Private equity is a common term. If you want your business to grow, you need money. If no lenders can be enthused via the regular route, a capital injection in this way can be a good alternative.
What is private equity and which form of financing is relevant for your company?
What is private equity?
When an unlisted company wants to grow, but there is a lack of capital, private equity is a solution. Investors give the business a financial boost, but in exchange for an equity stake.
There are several reasons behind the success of private equity parties:
- Tax advantage for investors as venture capital is rewarded;
- Shareholders have gained more power in recent years, making it worthwhile;
- Low interest rates and the business cycle to match were making borrowing money easier;
- Administrative benefits when a business is taken off the market.
Pros and cons
The biggest advantage, of course, is that you get financing to grow your business through the capital injection, but there is another significant advantage. Namely, the investor also puts his knowledge, expertise and network to use. This increases the likelihood of success, which is a source of motivation for both parties.
The disadvantage is the risk that automatically comes along with it. This is because the investor also gains control. As a result, something drastic almost always changes in your business, which as an entrepreneur can be difficult to deal with. Think about flipping the organizational structure and culture and choosing a different strategy.
Is this form of financing relevant for everyone?
For businesses in the startup phase, private equity is not nearly as common. These entrepreneurs also often fund their goals and dreams themselves, with a loan from family and friends being the most common investment. However, if you want to grow as an entrepreneur, or your business is in dire straits, financial help by attracting investors is always welcome.
Growing in your region or conquering an international market share, developing a new product or making a relaunch? These are all reasons to make use of private equity investors. You can find investors in all kinds of industries; from large international businesses to small-scale IT companies.
Different types of private equity
All investments that fall under financing a business without a stock exchange listing are called private equity, but there are different forms:
- Venture capital
- Seed capital
- Investment fund or fund of funds
- ETF
Venture capital
This form of financing applies to young companies that are experiencing rapid growth. In the Netherlands, we also call this venture capital, and with good reason. Investors take a considerable risk, because it is not yet known which way the business results will go. They can go through the ceiling, but also through the floor.
Entrepreneurs who want to bring an innovative product to market, which in itself is a risk. It may be the case that "high risk, high return" actually comes true, but it is not an absolute certainty. These venture capital funds start funding from around €200,000. Want to be sure you're hitting on a good party? Then check the register of the Dutch Association of Venture Capital Companies.
Seed capital
Whereas venture capital occurs with fast-growing, young businesses, seed capital is a lot riskier. After all, this is the start-up phase of a business, the seed that has yet to grow into a thriving crop.
For entrepreneurs, this is often the first round of financing, where a real injection of capital is requested to make a solid start. If this first round is successful, and the financing pays off, new, larger investment rounds often follow.
Innovative, creative entrepreneurs can also apply for a Seed Business Angel Fund, where half of the funding comes from an investor and the other half from the government. Here, the Ministry of Economic Affairs and Climate focuses on startups in various sectors.
Fund of funds
A fund of funds is an indirect way of investing. A private equity fund invests in other funds, thus building up a diversified portfolio. The specialization here is in buying shares in other funds.
The fund manager then conducts thorough research, due diligence and oversees all funds under the management of the FOF. The big advantage for investors is that the risks are dispersed.
ETF
Indextrackers (Exchange traded funds) are similar to mutual funds, but with a different structure. The management costs of an EFT are lower than for an FOF, but the return is often lower as well. Adding to this is the advantage that an EFT, during the trading day, is continuously tradable. So you can always buy or sell, whereas with a mutual fund this is usually once a day.
