Private equity disadvantages PDF

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Summary

An answer that summarises the disadvantages of using private equity. Often an exam question....

Description

Private Equity 

Management buy-outs and the likes of companies already well established

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Package of debt and equity finance

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Expect a return between five and ten times initial equity investment in five to seven years

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Firms receiving equity finance are expected to produce annual returns of at least 26 per cent.

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Types of private equity:

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Angel: Seedcorn: development of a business concept - Start-up - Other early-stage or First-round financing

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VC: Expansion (Development, Growth and Second-round)

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Private Equity: Management buy-outs (MBOs) - Management buy-ins (MBIs) - Leveraged buy-outs (LBOs)

Disadvantages 1.

Acquiring Private Equity from investors can be a frustrating and time-consuming process . It requires you to put forward a compelling case for why they should invest, whilst also reassuring them that you possess the necessary expertise to carry your business to it's next stage of development. As such, lenders will want to know more about your past performance, cashflow forecasts, turnover, what market research has been carried out and what qualifies you and your team to drive the venture forward.

2.

Dilution/Loss of Your Ownership Stake With private equity, you often get a lot of money, but usually have to give up a much larger share of the business.

3.

Loss of management control: Although you’re not required to repay investors, any capital that they do provide will come at the cost of equity (shares) in your business. As a result, this will have a direct impact on how much influence you have, giving investors the ability to cast votes on key decisions.

May lose control of basic elements of your business like setting strategy, hiring and firing

employees, and choosing the management team. 4.

Should any investors decide to make good on their return they could sell their shares to someone outside of your business. This might lead to someone with opposing views or a lack of sufficient experience buying into your business and having a say in key decisions....