Private equity is one of the ways to invest in the capital markets. It allows investors to invest in privately-held companies, which means that they belong to a restricted group of shareholders. Gain a deep understanding of this investment model and its importance for startups!
Unlike publicly-traded companies whose stocks are listed on the stock exchange, privately-held companies have a limited group of investors who become shareholders through investments like private equity.
Private equity investments can be made by companies, funds, institutions, or individual investors (natural persons) when the invested company receives capital to support its operations.
The investor, in turn, bets on the long-term profit generated by the business and, therefore, seeks companies with great growth potential to receive the investment through private equity.
Unlike venture capital (VC) funds, which mostly invest in early-stage startups, private equity (PE) funds target more mature and established companies in their niche, making this type of investment more stable and less risky.
To this end, investors who opt for private equity seek startups with profitable margins, as well as stable cash flows, and consider the financial and administrative metrics that prove this before making the investment.
What are the advantages of private equity?
A private equity investment aims to contribute in the medium and long-term to the company’s consolidation, gain more market space, and be ready to have a public offering and participate in the stock exchange.
At this point, the investor makes his exit from the startup’s shareholder structure by selling his stake in the business. This is where the fund recovers the amount invested and earns its profits.
For startups, private equity is advantageous for several reasons: in addition to providing capital, investors can directly contribute to management and help develop the business. In this sense, it is a joint effort of investors and founders to contribute to the company’s growth.
In general, the advantages for startups include:
- Capitalization of the company
- Entry of experienced managers (investors usually participate in business management)
- Improvement of credibility and institutional image
- Consolidation of the business in its area of activity
Private equity management and other type of investments
A startup can receive different types of investment (through venture capital funds, private equity, angel investors, and so on) at different times in its trajectory.
The management of these investments is done with the help of a cap table, a spreadsheet that provides an overview of the business, investors, their percentage, and how the exit should be done if the company is sold or traded on the stock exchange.
How to create a cap table?
A cap table can be created in an Excel spreadsheet, either manually or with the help of a template, but it is also possible to use software. As the startup grows and new investors enter, it may be difficult to keep track of a table, so it is recommended to have the support of platforms that facilitate management.
Carta, a Trace partner, is the leading platform for equity, capital, and liquidity management (stock options and company shares) and a powerful tool for startups and investors. It currently has approximately 30,000 companies as customers and more than 4,500 funds representing about $92 billion in assets. Learn more about Carta by clicking here!
How to hire Carta
Trace clients can hire Carta with a 20% discount during the first year and exemption from implementation fees. This benefit represents more than R$20,000 in savings for startups!
If you are already our client, request your discount at contato@trace.finance. If you are not yet part of our network, find out how we can also contribute to your startup’s journey by talking to our team!
