Should additional funds be required beyond those invested by the founder, we can rely on a group of capital partners who share our vision of sustainable growth and a genuine commitment to the legacy we are assuming. These partners, who invest their personal or family wealth, bring more than just financial contributions; they bring a sense of responsibility, respect for the foundations laid by previous owners, and enthusiasm for advancing the company’s potential.

Anyone who wants to invest needs capital. However, obtaining loan financing is often difficult for medium-sized businesses, not least because equity is usually scarce. In recent years, this financing gap has been increasingly filled by private equity firms. Many family businesses, however, continue to view financial investors with skepticism. Private equity investors have a reputation for being solely focused on short-term profit maximization. While this may apply to some, it certainly cannot be generalized to the entire industry. We will show you how medium-sized companies can also achieve successful growth with the right private equity partner.

To that end, we answer the five central questions:

• Why is equity financing so important?
• What is private equity?
• What advantages does private equity bring to the company?
• Which companies are private equity attractive for?
• How do you find the right private equity investor?

Why is equity financing so important?

Equity refers to the funds available to an entrepreneur after deducting all liabilities. This includes both the paid-in capital shares and the retained earnings that have not been distributed. Equity is the risk buffer that helps a business survive difficult times. It bears no interest and does not need to be repaid at fixed dates. Banks only grant loans to companies if sufficient equity is available. Therefore, a solid equity base is an important prerequisite for new investments and growth.

How much equity does a company need?

In principle: the more equity available, the better. Depending on the industry, companies face very different risks. Some have high initial investments that only amortize over a long period. Others must cushion strong seasonal fluctuations. Although there are no fixed standards, the prevailing opinion is that the equity ratio—that is, the portion of the company’s assets financed by equity—should be around one-third in the manufacturing sector. In young technology companies, half of the balance sheet total should ideally consist of equity. Equity ratios below 20 percent are considered critical.

What is private equity?

Private equity is capital participation provided by a financial investor. Unlike stocks, it is not publicly traded on the stock exchange. In principle, private equity is an option for all types of companies, including family businesses. The structure—such as voting rights and other rights and obligations—is individually agreed upon and mainly depends on the level of participation.

Who are private equity investors?

Private equity firms are investment companies that specialize specifically in this form of participation. Wealthy private clients and institutional investors invest money with them, which is then invested in company shares. Depending on the orientation of the private equity firm, both minority and majority stakes can be financed. If a private equity investor supports company start-ups, it is referred to as venture capital.

What goals do private equity investors pursue?

Private equity firms are financial investors. Their primary goal is to generate an attractive return for their investors. However, this goal can be achieved in different ways. Some private equity investors focus on acquiring undervalued companies, restructuring them, and profiting from the value increase during a subsequent sale. Others see themselves as long-term financing partners and expect corresponding profit distributions.

What advantages does private equity bring to the company?

The goal of the private equity investor is to increase the value of the company. The founder also benefits from this. The additional equity brings more security and liquidity. The company can invest and thus boost sales and profits. The higher equity ratio also improves creditworthiness and thus the negotiating position with banks. This opens up additional financing options that further support the company’s growth trajectory.

Private equity investors as business partners

Private equity firms usually offer not just capital but also know-how. They understand business processes, and due to their objective perspective, they find it easier to analyze a company’s strengths and weaknesses. While the company founder is often a specialist in their field, the experts are also familiar with the market beyond the specific business niche. Especially in family businesses that see little growth potential in their traditional market niche, a private equity investor can provide valuable impetus for a new strategic direction.

Which companies are private equity attractive for?

In medium-sized business financing, the requirements for loan approval are particularly strict. When loan approval is difficult or the interest rates are very high, private equity becomes an attractive financing alternative. Fresh equity improves not only liquidity but also creditworthiness. With private equity, companies can finance investments without risking liquidity shortages due to high interest and repayment obligations.

Private equity facilitates business succession

Every family business eventually faces the question of what will happen when the founder retires. Often, children or other relatives have their own career goals and no interest in continuing the company. And managers who have both the interest and competence often lack the funds to acquire company shares. Here, private equity can make an important contribution by preserving a life’s work and passing it into good hands. We have already presented the possibilities of management buy-out and management buy-in in the context of business succession in previous newsletters.

Emerging from a crisis with private equity

For companies in economic difficulties, private equity is sometimes the only lifeline. Financial investors specializing in restructuring can prevent insolvency through fresh equity and support the company with their expertise in strategic realignment.

How do you find the right private equity investor?

Just as no two companies are alike, the investment approaches of private equity firms also differ. An entrepreneur looking for a private equity investor should first analyze the strengths and weaknesses of their business and define the goals to be achieved with a private equity partner. Do you want to buy the company in the context of an MBO and acquire all shares in the long term? Or do you want to expand and aim for a stock market listing? It is important to find a financial investor who shares your goals. Investment companies like Pallas Capital have a broad network and can help you find the right partner. We also support you with:

• analyzing whether private equity is the right financing form
• developing an optimal financing structure
• professionally preparing presentations, investment documents, and contracts
• legal and tax matters
• structuring the best possible conditions and negotiating them

Are you interested in a customized financing solution?

Then schedule a free and non-binding informational consultation with our experts now.