{"id":129887,"date":"2024-01-03T10:50:32","date_gmt":"2024-01-03T09:50:32","guid":{"rendered":"https:\/\/prod1-sb.designtech.space\/private-equity-when-its-interesting-for-startups-and-scaleups-i\/129887\/"},"modified":"2024-01-03T10:50:32","modified_gmt":"2024-01-03T09:50:32","slug":"private-equity-when-its-interesting-for-startups-and-scaleups-i","status":"publish","type":"post","link":"https:\/\/www.startupbusiness.it\/en\/private-equity-when-its-interesting-for-startups-and-scaleups-i\/129887\/","title":{"rendered":"Private equity, when it’s interesting for startups and scaleups (I)"},"content":{"rendered":"

Definition and characteristics of the private equity industry<\/h2>\n

Private equity is a particular type of closed-end investment fund (not listed on the stock exchange). It consists of a medium-long term financial transaction<\/strong> in which a private investor invests his risk capital in private companies with strong growth potential<\/strong>, with the aim of enhancing them and then making a profit (disinvestment<\/strong>) through the sale of his share or landing on the stock exchange. <\/p>\n

Difference with venture capital<\/h3>\n

Up to this point, private equity could be confused with
\n venture<\/em>
\n capital<\/em>
\n<\/strong>. Although with similar objectives and always being venture capital, they differ in strategies<\/strong>. Venture capital, in fact, is a financial operation that intervenes in the early stages (e.g. seed) of a startup, while private equity focuses on more mature companies. <\/p>\n

Players in private equity<\/h3>\n

A private equity firm, on the one hand, invests On the other hand, it raises the capital<\/strong> of others institutional investors <\/strong>(banks, insurance companies, pension funds, financial holding companies and family offices) or qualified <\/strong>(very rich people) called Limited partner<\/em> (LP<\/strong>) within a fund. <\/strong>The company that owns the fund is called the General Partner<\/em> (GP),<\/strong> because it <\/strong>is responsible for the management and strategic decisions regarding the fund, while the Limited partners are only responsible for their own capital without an active role in the day-to-day management. PE funds identify from the outset the amount<\/strong> of capital to be invested, the duration<\/strong> of their business (usually less than 10 years) and their objectives<\/strong>. Funds are distinguished according to targets<\/strong>, i.e. the type of company in which to invest: for example, whether in a specific sector or by type of company based on the number of employees or turnover (large deals), if not in companies in crisis (turnaround of distressed assets<\/em>). <\/p>\n

Understand the concept of private equity and its relationship to business scaleup<\/h3>\n

The target company entering into private equity transactions must fall within the PE fund’s investment criteria and strategies<\/strong> . These companies thus have the opportunity to scale much more quickly<\/strong> through revenue growth<\/strong> and the injection of large amounts of liquid capital<\/strong>, without which they would spend more time, resources and energy. In addition, the GP offers its know-how in financial choices and logic<\/strong>, thus giving support to the founders or entrepreneur of the target company. Here, thanks to PE, it can reach the levels of a
\n
\n scaleup<\/em>
\n <\/strong>
\n<\/a>: companies that have raised (in the last three years) or have a turnover of up to 100 million dollars<\/strong>. <\/p>\n

Role of financiers in the scaleup process of companies<\/h2>\n

When the company is at an advanced stage, new investments from private equity could enter, through operations such as
\n growth equity<\/em>
\n<\/strong> \u2013 with the purchase of shares -,
\n secondary buyouts<\/em>
\n<\/strong> \u2013 with the purchase from other PE funds (i.e. funds that have already acquired the shares of a target company), and finally there are sector
\n funds<\/em>
\n<\/strong>, often called industrial or technological, which make use of a team, advisor, network or know-how specialized in a certain sector. <\/p>\n

How Private Equity Supports the Growth of Startups in Development<\/h3>\n

You often hear the claim that private equity differs from venture capital because it doesn’t invest in startups. Attention: the correct statement is that PE invests in startups but in the most advanced stages of them, when the startup has grown with the transition from micro-enterprise to SME or large company, thanks also to the contribution of venture capital. In fact, private equity enters a startup through
\n growth equity<\/em>
\n<\/strong> operations, for example: when the startup is at an advanced stage (after the seed phase<\/a>), new investments could enter from Private equity, which buys the company’s shares from venture capital (in this case the VC makes an exit operation), until then in their possession. This is how the company has the ability to scale faster and become a scaleup. <\/p>\n

Selection criteria for private equity investments<\/h2>\n

Once the private equity fund has been created<\/strong>, a capital raising<\/strong> phase follows. This phase has a period and, when the collection is defined as closed, no one will be able to invest in it anymore<\/strong>, not even the LPs themselves. After collection, a phase of research of the target companies<\/strong> takes place, often carried out by well-qualified advisors, who, having identified the companies, through due diligence<\/strong> will understand whether they reflect the criteria of the GP. <\/p>\n

How Private Equity Lenders Evaluate Investment Opportunities<\/h3>\n

Due diligence is therefore a real CT scan of the company: it can be legal, financial, accounting or industrial. If the result is positive, once the shares of the company have been acquired, the private equity operator will accompany him for the following years in the decisions to improve the company and where, perhaps, the entrepreneur would not be able to take alone, for example in the choice to
\n internationalize<\/strong>
\n<\/a>, the creation of a newco<\/strong>, M&A<\/strong>; or thanks to its network in the financial world, the PE is able to reduce the company’s debt<\/strong> by renegotiating interest rates and conditions on the loans that the company has in place with banking institutions. <\/p>\n

Benefits and Opportunities of Private Equity in Business Growth<\/h2>\n

Private equity in an agile way provides companies with liquidity and useful skills<\/strong> for their exponential growth. But it is not limited to this: it offers support<\/strong> and in some cases guides the target company in strategic and financial choices<\/strong> throughout the duration that precedes the divestment of the fund. <\/p>\n

Operational strategies to make the most of private equity investments<\/h3>\n

Lately, many private equity operators are breaking the classic schemes and structures of the closed-end fund: they invest with a
\n permanent capital<\/em>
\n<\/strong> logic (without a predefined maturity), i.e. they offer companies increasingly patient capital suitable for supporting long-term growth with a very industrial and value-creating approach over time, thus without respecting the 10-year limit. But PE strategies can be different based on the needs of the market. In recent years, PE funds have sought to create a better balance in their investment portfolios by inflating investments in countercyclical sectors<\/strong>. On the other hand, some have accelerated their exit strategies<\/em><\/strong>, while others have become more cautious in assessing<\/strong> target companies. It should always be borne in mind that the initial strategies differ according to the target company to which the PE operator wants to operate and for its phases: <\/p>\n