What is Private Equity Funding and How Could It Help Your Business?

Published on August 21, 2020
Categories Private Equity
private equity funding

As a business owner, you might be looking for ways to collect money to expand your business or help get it back to a profitable state. You have some options, all with various commitments and financial agreements. One of your options is private equity funding, which essentially allows financial investors to contribute funds toward your needs.

As you look for ways to raise the necessary funds to grow your business, we’ll help you better understand private equity and how it can be an asset to your business.

What is Private Equity Funding?

private equity funding

Private equity funding for a business is alternative funding that helps businesses get established in the marketplace, expand operations or fund new equipment or technology.

While you might think of private equity funding as something startups seek, even established and thriving businesses sometimes seek funding. Venture capital firms focus more on providing funds to help startups get established and show initial results. Established businesses might seek money to develop new products, expand to additional audiences or acquire another business.

Depending on the success and value of your business, how you’ll be using the funds and the private equity firm you work with, you could find yourself discussing private equity agreement of up to $5 billion.

While these enormous investments are of course rare, private equity focuses much more on established businesses that need capital to grow their operations, which takes a great deal of money.

Expanding on an already successful business means there is already some promise to what you’re doing. This business success can help give investors confidence in their investment, thereby increasing the total funds available.

How Does Private Equity Funding Work?

The television show “Shark Tank” helped grow awareness for private business investments. There are many ways a private equity firm can draft an agreement with a business. One of the most popular though is to purchase a stake in the business.

This means that you are committing to giving those investors a share in your business in exchange for their investment.

Most private equity investments take many years to pay off for investors as businesses must take time to grow operations and increase sales, thereby increasing the value of the business overall.

Other agreements with private equity firms can work more like a loan. Mezzanine financing is high-risk for investors as this debt is paid back last if businesses fold. Therefore, businesses that seek these funds must pay back the money along with a high-interest rate to cover the investor’s risk.

How Can My Business Use Private Equity?

private equity funding

Private equity can be the lifeline that helps struggling businesses become profitable through strategic business moves. For business owners looking for a way to sell their company, private equity can also help with pairing you with interested buyers.

Here are some of the ways you could use private equity funding for your business.

  • Fund new technology: overhaul your data center or invest in developing new software solutions for your customers. Private equity can help fuel your technological development without taking away funds from the day-to-day operations of your business.
  • Make an acquisition: acquire another business or product to expand your portfolio. You can use private equity to fund this acquisition so you don’t interfere with your regular cash flow.
  • Expand working capital: your working capital is the difference between your assets and your liabilities. Having too many liabilities and not enough assets can make operations difficult. Balancing those out with improved working capital can help you operate in a cashflow positive way.
  • Improve a balance sheet: improving your balance sheet can make your business more attractive for acquisition, make operations run smoothly and reduce bad debt. Private equity can help you improve collection operations or sell off assets you no longer need.
  • Seeking a full company buyout: in addition to offering capital to expand and grow businesses, private equity funding can also offer a full company buyout. Business owners looking to get out of their business can seek a buyer using a private equity firm.

Benefits of Using Private Equity

Businesses considering private equity as a way to raise funds should evaluate the benefits of such a financial move. Here’s a look at some of the reasons why you might want to consider private equity funding.

  • Large sums available: private equity offers enormous sums of money compared with what you might be able to get from a bank loan. This can help you scale a business quickly.
  • Business advice: some private equity arrangements include getting insights and advice from your new business partners. Because an investor now owns a stake in your business, they might serve as a business mentor to ensure the success of their investment. Some investors offer a new perspective by reviewing the business’s entire operations to look for opportunities.
  • Access to funds if banks deny loans: businesses struggling to get a loan can benefit from private equity funding. Banks tend to look solely at financials, whereas investors can view a company from its overall potential.

What to Look for in a Private Equity Firm

private equity investment

Because private equity is essentially a partnership with a business and these investors will have an interest in the success of your business, choosing the right private equity firm to work with is essential.

Each private equity firm has a different area of focus or ideal business investment it seeks. Because of this, you might get outreach from one of these firms requesting a partnership with your business. Take this outreach seriously as these fund managers do in-depth research to find the right businesses that their strategy does the most good for.

Remember, fund managers make commitments to their investors to get a return on that investment. So if the firm is interested in investing in your business, it’s because they believe they have the right strategy and experts to ensure your business succeeds.

But what if you need funds and haven’t received any outreach from a private equity firm? You can certainly research your options and reach out to these companies directly.

Start by looking for a private equity firm that invests in companies of your size. Venture capital firms generally seek new startup ideas whereas private equity firms look for established businesses.

Redwood Capital Advisors focuses its investment portfolio on lower-middle market companies.  Our investments range from $250,000 to $15 million in funding across the capital structure.

Some businesses look for the firm that will offer the largest valuation for their business. This strategy carries with it some risks. Just because a private equity firm gives you a larger valuation or offers you more capital does not mean that they are the right partner for you.

Do your research and keep in mind that the firm you choose becomes like a partner in your business. Focus on a firm that you believe you can have a good working relationship with.

About Redwood Capital Advisors

Our team of experienced investment managers and business experts helps owners struggling in inefficient markets. We bring creative thinking and discipline to the business to help you remove barriers to success.

Redwood Capital Advisors has proven strategies that help businesses grow and offer a return on investment to our valuable partners. Contact us to make a private equity request.

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