Businesses can attract investors and unlock capital using several methods when raising funds. The two most typical are debt and equity, both of which can be structured in a few different ways.
When debt isn’t a favourable option, equity is the obvious choice, giving a business an injection of cash in return for shared ownership. For businesses and investors, both public and private equity have their own unique advantages and disadvantages. So, when comparing private equity vs public equity, how do you know which is right for your business?
A private equity investment is a financial investment made in a company (or group of companies) that is not publicly traded on a stock exchange. The capital comes from high-net-worth individuals, also known as accredited investors, and institutional investors such as venture capital, hedge funds, large mutual funds, and endowments. Long-standing regulation means that everyday (retail) investors are typically unable to access private market opportunities. This however is changing, with the rise of equity crowdfunding platforms such Snowball Effect, PledgeMe, Equitise & Birchal that allow retail investors to access previously unreachable private market company opportunities.
A private equity fund combines capital from various investors, which is channelled into a private company in order to add value. These funds are usually structured as limited partnerships, meaning that investors are only responsible for the amount they contribute to the fund. Private equity funds are primarily run by general partners, who select investments and oversee the fund. As a result, general partners may be held liable for potential debts if the fund goes bankrupt.
Private equity investments can generate significantly higher returns than traditional asset classes, but they have relatively long holding periods, typically ranging from five to ten years or more. They may also necessitate additional investments over time rather than a single large initial investment.
Public company shares listed on a stock exchange (such as the New Zealand Stock Exchange, NZX, and Australian Stock Exchange, ASX) are considered public equity investments. All investors, regardless of net worth, can invest in public equity. As a company, listing on a public stock exchange (called an “initial public offering” or “IPO”) involves a complex and rigorous process that involves complying with various regulations and requirements. Once public, companies must follow a strict set of regulations and are required to disclose commercial activity and financial results to the public.
Investing in public equity is appealing for several reasons:
Liquidity: A company's public shares can be bought or sold on a public exchange in minutes or even seconds, whereas private equity has a very limited, and often hard to come by, secondary market.
Transparency: When looking at private vs public equity, public equity markets are more transparent and are strictly regulated, shielding investors from unanticipated risks.
Established performance: While not all businesses on the public stock exchange are successful, to be publicly listed, they must first demonstrate a certain level of growth. As a whole, the stock market tends to appreciate in value over time.
Whether you opt for the public or private equity route, the result is the same - a significant financial investment in your company. But before making a decision, it’s important to understand the expectations, regulations and limitations both options dictate.
We’ve already touched on a few of the differences between private equity and public equity, but let’s look deeper into what sets these two investment opportunities apart.
Meaning: At the most basic level, public equity shares reflect an investor's ownership in a publicly listed company’s organisation. In contrast, private equity shares reflect the ownership an investor has in a privately listed company’s organisation.
Open to: When a business is publicly listed, its shares are made available to the general public. If a company is privately listed, only those with access to the listing are able to invest, which is usually restricted to high net-worth individuals, venture capitalists, hedge and mutual fund managers and institutional investors.
Regardless of whether you trade publicly or privately, it is worth exploring the reasons to move to an online share register, which can help track and manage your shares.
Privacy of information: Public companies are required to be totally upfront with the public about their operations and financial activities. Private companies are not required to disclose this information to the public and therefore have greater privacy of data.
Pressure: Privately listed companies have the flexibility to work toward long-term goals, as they face less pressure to demonstrate an immediate return on investment. Meanwhile, publicly listed companies must focus on shorter-term goals in order to show the public adequate returns. This is one of the most significant differences between private and public equity from a future-planning perspective.
Focus: Due to the nature of the investment required in this method of equity gathering, private firms typically target individuals or organisations with large capital reserves. Public firms can cast a wider net, targeting the general public, but these investors will likely have less capital.
Regulatory restrictions: Being held answerable to the government and general public, the public equity sector faces tougher regulatory restrictions and therefore needs a more robust framework. Conversely, because they are not required to disclose specific details of their investment policies to the government or the general public, the private equity sector has a relatively simpler regulatory framework.
Trading of assets: Public equities are easily transferable and regularly traded within the general population. However, private equities usually require the consent of the company founder before a trade can occur.
Generally it can be more difficult to raise funds publicly than privately because going public requires a higher level of disclosure and compliance with regulations. Private market investors may be more willing to invest in a company without as much information or oversight, but public market investors typically demand more transparency and scrutiny. Additionally, the costs associated with going public, such as legal and accounting fees, can be substantial. However, going public can also provide access to a larger pool of potential investors and increase the company's visibility and credibility.
However, whether your business has decided to publicly or privately seek investment, maintaining your share database is crucial to your ongoing success. Orchestra’s online share registry tool helps you manage and maintain your list of shareholders and tackle various other labour-intensive administration tasks.
Learn more about share registry management, or find out why companies need an office register and own share registry.
For more information on the topics covered, go to;
6 Benefits Of Private Equity InvestmentThe Ultimate Guide To Equity