Private equity is a booming business. Over the last decade the volume has grown by around eighty per cent. At the same time, interest in the stock market has seemed to decline. Twenty years ago, the US had twice as many listed companies as it does today. In other words, more private entrepreneurs are choosing to remain private, precisely because there are a lot more opportunities to grow today with an investor on board.
Best practices and added value
Private equity offers clear added value to a company. These are experts who constantly analyze businesses. As a result, they have a good insight into best practice, across diverse sectors. Private equity funds make their knowledge available to the businesses in which they participate. After all, they have every interest in ensuring those businesses succeed. They invest in a close partnership.
Funds play on their expertise – for instance in particular products or sectors – as a competitive advantage. There is a great deal of capital available today but the expertise and experience a fund combines with it, ultimately make the difference.
Working purposefully and procedurally
The majority of businesses still have little experience with private equity. In practice, it is even true that private equity players prefer actively to search for interesting investment opportunities so that they are not competing with others. Professional parties work purposefully and procedurally. A business plan is developed together with the manager/investor, linked to a term within which the expected value creation must be achieved. The management will receive an additional reward if the private equity party realizes more than a minimum return during the term of the investment.
In other words: the private equity partner will very deliberately search for value. Naturally, that can only be good news for the business, because it gives it an active shareholder, who will judiciously contribute to the added value realized. This active attitude is also absolutely crucial. As a rule, private equity used to rely solely on a combination of market growth and financial engineering. Today, private equity relies on a highly disciplined governance structure.