You’ll have read the stories over the last few months about big high street names like Debenhams, ToysRUs, Poundworld and Maplin having gone into administration and sought out private equity to keep a company running.

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Sometimes it works (as was the case with Debenhams), and sometimes it doesn’t (the case with Maplin). Although we hear it all the time in the news, private equity is a phrase that causes a lot of confusion for people who haven’t a clue what it stands for or why it’s important for businesses.

To save yourself the embarrassment of having to guess what it’s all about, we’ve created a handy guide that has every question you could have about what private equity is, how it works and why it’s so important.

After a quick read, you might just become an equity expert. It all starts with making it as simple to possible to know what it’s all about.

What is private equity?

It can get a little confusing when you get to the ins and outs of what it’s all about, but in the simplest terms, private equity is when someone owns a part(shares) of a company that isn’t publicly traded. If a company isn’t on anything like the London Stock Exchange or NYSE, it is traded privately.

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It is more common for global companies to go public (for example Facebook and Apple), rather than big companies within a country deciding to go on an exchange.

Most of our biggest private companies are on the high street and investing privately is very common, with the majority of business carried out in Scotland done so privately.

Why are so many high street names private companies?

A lot of high street names are private companies because they start as a small business or department store that slowly grows over time. Think of brands like Topshop, Argos, Currys and John Lewis that are everywhere around the county, but are still private.

The biggest retail names will usually be publicly traded, with supermarkets like Tesco, Sainsbury's and Marks & Spencer all publicly listed on stock exchanges.

Many big retail names also like to stay private because it stops them from having to report more about their financials. They don’t do it to be shady, just that it can be a lot less hassle to deal with than operating a company publicly and complying with all the financial reporting rules that need to be followed.

Can anyone have private equity in a company?

Yes…as long as you have the money to do so. Many companies either have a single person who buys shares, or private investment firms that buy on behalf of people. The most notable example of a private investor here in the UK commonly making headlines would be Mike Ashley who is the CEO of Sports Direct and owns House of Fraser.

Glasgow Times: Credit: UnsplashCredit: Unsplash

How do people invest in private companies?

Let’s say you wanted to invest in a private company. If the company was starting out, you could come in as an angel investor and give them money to grow. It’s a bit of a risk but helps you get in there early.

Now, when it comes to a company like Debenhams, you can’t just make a bid, and that’s it. What usually happens is that a company will need capital (money) to open and run new stores and may ask for new investors to come on board through an investment group or venture fund. That’s where anyone can get involved as long as they’re buying shares in a group.

And while a company may be private, a shareholder is allowed to publicly sell shares if they want rid of them, meaning some people can invest quickly.

How do companies control private equity?

You may remember the news in 2018 about the possible big merger between Sainsbury’s and ASDA. That involved going through a lot of legal processes that the companies themselves can’t just say yes to.

They have to get help. Companies that are getting bigger (or smaller) will hire lawyers to make sure everything is above board.  Here in the UK private equity lawyers like Goodwin Law work with big companies when it comes to tricky subjects like buyouts or mergers.

If a business doesn’t have everything in order and they don’t look after their credit correctly, it’s time to get the administrators in.

What does “calling in the administrators” actually mean?

It’s definitely the phrase you read the most in the paper when a company has financial problems. Here in the UK private companies can’t really say they’re bankrupt like in America. And while it’s a scary thing to hear, it’s probably one of the calmest parts of sorting out a big business that’s got into trouble.

(You can see our list of UK names that went into administration in 2018 here)

Glasgow Times: Credit: UnsplashCredit: Unsplash

Administrators will come to a company, see how much money they own creditors and then figure out how much can be paid back in assets, then see if the company can turn things around. The best example of that on the high street would be HMV. The company has fallen into administration twice. They came out of it ok on the first occasion in 2013 but fell back into administration right after Christmas 2018.

We’ve seen the effects of the recent issue close to home in the last few months with their Braehead store closing and re-opening as the company tries to sort itself out.

What else is there to know about private equity?

That’s the basics covered. Private equity is surprisingly easy to wrap your head around. After reading this, you could fancy yourself the next Richard Branson or Lord Sugar and see what life as an investor in private equity is like.

Glasgow Times: Credit: UnsplashCredit: Unsplash