Businesses have several options for obtaining investments. The most common options are debt or equity. Private equity is a way in which investors have a stake in your business and make a profit as the company grows. Public and private equity have advantages and disadvantages for both entrepreneurs and investors. Nevertheless, all types of companies use these ways to raise capital. Private and public companies can structure share offerings differently, providing investors with extra returns and voting options. This article will take an in-depth look at these two concepts.
Private equity – its main characteristics
In preference, companies start as private companies, but public companies can easily become private if they sell all of their public stock. The most important difference between personal and common equity is that private investors receive their income from stock distributions, not accumulations. These distributions continue throughout the investment period. Another difference between private and public capital is that private placements are much less regulated and involve more risk. Thus, riskier investors will participate in them.
Such investors are called accredited, that is, investors with a certain net worth. They can be individuals or entire banks, or pension funds. Private companies are more focused on pleasing a small clientele. This, in turn, leads to fewer restrictions and investment guidelines from regulators.
Raising capital through a private placement is very similar to an IPO. Private companies work with investment firms to structure the offering during this process. Specialists help structure the value of the private equity or paid-up capital, verify investment demand, and set an investment date. Private companies can then demand certain commitments from investors, which cannot be done in public investments. The main purpose of any investment is to stimulate the company’s growth. However, in the case of private investments, it also has other goals; for example, sometimes a private equity deal is made so that the company later becomes public, and it also loosens the hands of its management in the allocation and management of capital.
Public capital – its main features
Investors tend to be more aware of public equity offerings. They prefer this investing method because it is safer and more accessible to all investors. Another advantage of public offerings is their liquidity since most public stocks are available and traded on public exchanges daily.
When a company wants to make an IPO, it can’t do without the services of an investment bank. In this transaction, the investment bank acts as an underwriter, similar to a wholesaler. It facilitates the sale of the offering and handles its pricing. Thus, the underwriter’s responsibilities include:
- Forming the price of the stock
- Documenting, submitting, and listing the offer on the public exchange
Sometimes, they even show interest in the offer if a certain number of shares are successfully purchased. The principle of realization of successful capital is quite transparent and simple. This process happens all the time, and thousands of public companies worldwide have once gone through the IPO process.
The main differences between private and public capital
So, to summarize, the main differences between private and public equity are as follows:
- Investors – in private equity, only a minority gets access; in public equity, the whole public can buy shares
- Liquidity – in private equity, shares are not allowed to be sold for a few years, while in public offerings, one can do this at any time
- Interaction – in private equity, investors can vote and develop strategies; in public offerings, investors are more passive