The Voice of Experience : Public versus Private Equity

public capitalPublic and private ownerships represent very different packages of benefits and costs. In the public equity, the market represents a superset of all possible investors and the companies are big enough to raise the equity in the market almost any time at affordable costs. According to the experts, being a public equity gives more financial flexibility to the company, along with increased credibility in the eyes of its suppliers, employees and customers.

Real costs are used for raising the capital in public market and being a public enterprise, these costs may be substantial. The fees paid to the underwriters, attorneys, auditors and intermediaries typically run from 3-5% of the gross proceed of offering for a public company, based upon the size of issuance and other factors. Investor relations efforts and compliance involve extra costs. If a public offering is announced, the stock price of company drops by around 3% and sometimes, as much as 10%. While this may not be a big figure, the cost may affect the value of the company shares.

Public investors are the dubious providers of capital and can be at material informational disadvantage via company’s executives and insiders. If a company raises equity in place of raising the debt or relying upon the internally generated finance, the investors start speculating about the overvalues of the firm. The public capital is readily available while the company may not be in the need. Much like the credit, it is cheapest when the time is good and a company is already enjoying high cash flow. At certain times, the public investors may provide capital only reluctantly.

private equity marketThe market of private equity is structured and operated quite differently from the market of public equity. Private investors believe that they offer different propositions from the public market. Instead of simply offering capital for passive equity interests, most of the private equity investors attempt to add value to the businesses in which they invest. In comparison to public investors, the private equity investors demonstrate long-run and sustainable differences in performance and ability. Unlike mutual funds, the past performance in private equity appears to have predictive powers.

Private equity funds are operational in a market with significantly lower degree of liquidity and efficiency. The skills needed to gain success are broader than those needed while investing in public companies. Private equity investors are considered to be more active investors who add complementary skills to the sponsored companies and management teams. That is why most of the successful companies aspire public ownership, rather than a private one.

The Voice of Experience : Public versus Private Equity
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