The real benefits of sourcing private equity for entrepreneurs

More and more entrepreneurs are viewing private equity and venture capital as sources of small business finance for their business plan a recent report has found. With bank increasingly becoming more risk averse when it comes to SMEs the next best option - and in my mind a much better one as it also provides you with experience and support from entrepreneurs who have been there and done it successfully - is that of private equity, venture capital or Angel finance.

With LinkedIn recently announcing it will be the first social networking site to launch an IPO, while other venture-backed companies like social network Facebook and discount retail site Groupon have attracted heavyweight investors. One in leading entrepreneurs will be looking to private equity and venture capitalists to raise capital in 2011, according to a survey by Investec.

Forty-four per cent of those interviews say they are expecting to launch new ventures and a further 31 per cent believe it is “quite likely” that they will do this.

However, their plans could be put on hold because many still fear that access to capital could be difficult. Only six per cent expect it to be easy to raise funds during 2011.

But what are the real benefits of sourcing private equity for entrepreneurs? Theo o'Brian from http://privateequityblogger.com/ talks about hither following advantages for business owners:

Companies that are backed or acquired by private equity firms are often made more efficient and produce higher profits, which benefits now only the private equity firm but also the company.

Private equity firms use skilled management teams to correct the problems and ineffective parts of the company and many times this intervention prevents the company from further declining or even failing.

The management receives carried interest, a portion of the profits, so managers and their staff are motivated to produce good results to investors. Although carried interest is often criticized for taking money from the investors, it is a very big incentive for managers.

By definition, private equity firms work outside the public eye and do not have to follow the same transparency standards that public firms and funds must adhere to. This allows private equity firms to reform the companies without the constraint of having to report quarterly to the SEC or similar distractions.

Private equity firms generally perform very rigorous due diligence on potential investments. By utilizing a team of researchers the private equity firm is able to identify most risks that would not otherwise be found.

Private equity managers are paid very well and so it is easy to attract high calibre, experienced managers that tend to perform very well. The same goes for lower level employees at private equity firms, they tend to be the top young business school graduates.


Looking at these, its not surprising that so many business owners are opting for this solution when it comes to raising finance for their businesses and if the trend persists we may see this percentage rise even further