Private equity stands out as a really interesting investment and business funding option that is much stronger than numerous alternatives. The system used by the large private equity companies is well laid out. The firms look for businesses that have high potential but are faced with financial difficulties or companies that are looking to grow and invest in them. Normally, invested funds are very high, with deals going over $500 million, sometimes reaching billions of dollars.
Mard Leder highlights that private equity financing does offer some pretty distinct advantages when looking at the other funding options that are available. The main benefits that always need to be mentioned are the following.
Large Funding Amounts
Out of all the funding options available for companies, private equity stands out as the biggest one possible. Simply put, the amounts of money that can be offered are the highest. Deals tend to be measured in hundreds of millions, as opposed to millions or hundreds of thousands with other financing options.
The impact that these really large amounts can make is usually huge. For instance, in the year 2009 we saw Delaware City Refinery faced with financial difficulties. As a result, most of the employees had to be fired and the main refinery was closed. One year later, a private equity firm invested a massive $450 million and drove the re-opening of the refinery and rehiring of around 500 employees.
An Active Involvement
Many will see this as a disadvantage but the truth is that it is almost always a clear advantage. With most funding options available the lenders or investors have minimal business running involvement. With private equity firms we are looking at a true hands-on approach. The company comes with professionals and re-evaluates all business aspects. The goal is to maximize overall value.
Obviously, problems can appear because of the active involvement. Oftentimes maximizing value does not mean the same thing as the initial owners of the company think. However, the fact that there are industry professionals that are experienced and that are involved in the business leads to really major improvements. In the vast majority of cases companies became much more popular after professionals got involved.
Because of the fact that the private equity firms have high interests in the investment, they want the business to be successful. Just think about the fact that the funds are often borrowed. The loans need to be paid back and profit still needs to be generated.
The private equity firms often have individual partners with access to their own investment money. Partners can even make some extra money when performance fees are involved. All this means that strong personal incentives appear. The result is having a team of professionals that are interested in increasing the value of the company.
Really High Returns
Last but not least, the combination of incentives, expertise and major funding can cause huge returns. It is possible that profits substantially grow and that companies manage to achieve growths that are over 50%, which is quite rare in the current modern economy.