Private equity buyouts were previously known as venture capital transactions and are carried out in many different arrangements. However, the key focus in private equity buyouts is the capital used to fund the transaction. In a private equity buyout the funds being used have particularly been allotted to invest in unquoted securities rather than publicly quoted securities. Private equity buyouts can be divided into three expansive categories, these are listed below.
- Startup: The funds can be used to start a business from scratch
- Buyouts: The funds are used to purchase a business
- Development capital: The funds are used to develop and expand an existing business
In most cases an existing business will consider a private equity buyout, if they lack the capital to grow or sustain their business and all other options have been exhausted. These businesses will have to forego a significant portion of their equity to the investors in order to obtain the required funds. Investors on the other hand are looking for businesses which need the funds to grow and have the potential of reaching a higher financial standing. Investors will provide the required capital but will retain equity in the business, the percentage of equity depends on the terms of the contract.
Yes, this means that a private equity transactions do not always mean the investor has outright purchased the business as they could have been offered a low equity share or have some other arrangement. In some cases the investors will simply buy assets in piecemeal fashion while in others they might obtain a 51% equity share or more and buy the business outright.
What Happens After A Private Equity Buyout?
After the investors have bought the business outright via a private equity buyout, their team will determine the future trajectory of the business. Normally a private equity company will purchase a business but will not plan on owning the business forever, they would rather help the business reach a point where they can cash out the business and provide investors with their profits. There are three common ways a private equity company may garner their return on investment. These are as follows,
- The buyout company may shed the business to another buyout company (secondary buyout)
- The buyout company may conduct an initial public offering
- The buyout company may strategically sell the business to a competitor in the same market
How the buyout company handles the post purchase phase, depends on their respective goals and strategies. They might want to maintain their equity in a lucrative business for steady royalties or enjoy continuous profits. However, there are certain common features of the buyout process which are evident in almost every type of equity buyout. These are as follows.
It very common for the buyout process to include layoffs and it is considered to be a private equity company’s signature move. Layoffs are a cost cutting measure as it helps buyout equity companies reduce overall costs and increase their ROI. Private equity companies may also lay off current employees to drive in new talent or more skilled employees.
Once the private equity buyout is complete, target companies rely on the debt taken to finance their respective debts. Private equity companies are legally obliged to handle all of the debt of the company after the purchase or it will be in danger of defaulting on its obligations. So after the deal is complete, these companies will have to handle all of the debts before proceeding.
At the end of the day, each private equity buyout has its own respective features. Companies involved will instill their goals into the transaction and this will define the entire process. Watch this space to learn more about equity buyouts.