Private equity

What private equity means

Private equity is investment capital in companies not listed on a stock exchange. The investor acquires shares and becomes a co owner. Their goal is not an ongoing dividend but the increase in value: after some years the company should be sold at a higher price. The horizon is usually four to eight years.

For an online shop that is one possible route to finance growth without paying ongoing interest. The price is control: with a majority stake the investor decides the direction.

How types of capital differ

Bank loans are debt and have to be served regardless of the result. They are cheap when the business is stable and dangerous when it fluctuates. Equity is only rewarded on a sale. It shares losses and is expensive when the development goes well, because part of the increase in value is given up.

Between the two sits mezzanine finance, combining elements of both. For a shop with predictable revenue a mix is common: debt for basic equipment and equity for growth and acquisitions.

Which expectations arise

• Growth: equity expects growth above the market average. That is the basis of the return.
• Predictability: figures have to exist monthly, with contribution margin per product and customer. Anyone who cannot deliver that loses trust.
• Freedom from individuals: a second and third responsible person is a precondition, because the value on sale has to stand without the founder.
• Professionalisation: accounting, process documentation and reporting have to withstand an examiner.
• Acquisition: takeovers are often part of the plan, because they scale faster than organic growth.

What happens to the business

Three things usually change. First speed: decisions are made faster and administration grows. Second the figures: instead of revenue the recurring contribution margin moves to the centre. Third the perspective: everything is aligned to the sale in some years, which favours building recurring structures but also creates short term pressure.

For the founder the central question is whether they share the goal. Anyone wanting to build a lasting business fits a partner who thinks long term. Anyone demanding short term return fits someone focused on growth. That question should be settled before the investment.

Frequent questions

• Do I need private equity? Only when growth would otherwise fail on capital.
• From what size? Below a million in earnings the effort is rarely proportionate.
• Do I stay as managing director? Often yes, but with limited freedom of decision.