The Development and Growth of Private Markets, and a need for Research Support Services in this sector
Finding information about private companies is more time consuming and difficult since the primary source of information tends to be news stories, as they are not required to file financial statements. This calls for specialised teams of domain experts providing support services in sourcing and analysing financial data on such markets.
Before we go into detail about private market research, let’s take a look at a few foundational aspects of private markets, to get a better understanding of its complex working.
Private markets are an alternative mode of private financing, away from public markets, in which funds and investors directly invest in private companies or engage in buyouts of such companies. As such, the private equity market is an important source of funds for start-up firms, firms in financial distress, and public firms seeking buyout financing. A private-equity investment will generally be made by a private-equity firm, a venture capital firm or an angel investor. Private equity is a major subset of a larger, more complex piece of the financial landscape known as the private markets. Private equity is an alternative asset class alongside real estate, venture capital, distressed securities and more.
Private equity firms offer financial backing to private companies, and invest in their private equity through a number of associated investment strategies such as venture capital, growth capital, and leveraged buyout. They engage in a number of functions to ensure that they get a return on their investment. They need to raise capital from limited partners or from their own money to contribute to the fund. The equity firm will then perform due diligence when analysing potential companies for acquisition. They will also be involved in the management of the company by providing support and advice on strategy, financial management, and operations to improve the performance of the company. This will ensure that the eventual exit is profitable.
This demonstrates a complex network of functions and activities carried out by private equity firms, which requires in-depth research and analytics, to extract insight.
Now lets see the advantages of private equity
- It is favoured by companies because it allows them access to liquidity as an alternative to conventional financial mechanisms, such as high interest bank loans or listing on public markets.
- Certain forms of private equity, such as venture capital, also finance ideas and early stage companies.
In the case of companies that are delisted, private equity financing can help such companies attempt unorthodox growth strategies away from the glare of public markets. Otherwise, the pressure of quarterly earnings dramatically reduces the time frame available to senior management to turn a company around or experiment with new ways to cut losses or make money.
A quick brief on the development of private equity:
Although the capital for private equity originally came from individual investors or corporations, in the 1970s, private equity became an asset class in which various institutional investors allocated capital in the hopes of achieving returns that exceed those possible in the public equity markets. Between 1980 and 1994, the amount of private equity outstanding rose from less than $5 billion to $100 billion.
The growth of private equity is a classic example of the way organisational innovation, aided by regulatory and tax changes, can ignite activity in a particular market. In this case, the innovation was the widespread adoption of the limited partnership.
Until the late 1970s, private equity investments were undertaken mainly by wealthy families, industrial corporations, and financial institutions that invested directly in issuing firms. Much of the investment since 1980, by contrast, has been undertaken by professional private equity managers on behalf of institutional investors.
The growth of the private equity market has expanded access to outside equity capital for both classic start-up companies and established private companies.
Sometimes, the equity firm may make negative decisions like closing down units that are not profitable or laying off workers to improve the company’s profitability. As soon as the struggling company is up and running, the equity firm can choose to exit the investment by offering it for sale to another equity firm or to a strategic buyer. It can also exit the investment via an initial public offering.
To conclude, in this article we have looked at the development and growth of private markets from a very broad viewpoint, and understood a bit about its structure and functioning. In future blogs we will delve more into the larger financial markets, and how in-depth research into the various financial markets can uncover insights for business growth.
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