The comparison between private equity and debt as a capital resource

Obtaining private equity is very different from raising debt or loan from a lender, such as a bank. Lenders have legal right to interest on a loan and repayment of the capital, irrespective of company’s success or failure.

Private equity backed companies have been shown to grow faster than other types of companies. This is made possible by the provision of a combination of capital and experienced personal input from private equity executives, which sets it apart from other forms of finance. Private equity can help companies to achieve their visions and provide a stable base for strategic decision making. Private equity firms will seek to increase company’s value to its owners, without taking day-to-day management control. Although the owners may have a smaller “slice of cake”, within a few years this “slice” should be worth considerably more than the whole “cake” was to them before.

Debt providers are secured with the interest payments and capital repayment of the loan. And these payments are usually guaranteed by business assets or company owners’ personal assets like home, land etc. If company defaults on its debt, as a last resort, lender has the right to ask liquation of any asset, which may lead bankruptcy. Therefore debt is secured in this way and has a higher priority than that of general unsecured creditors.

By contrast, private equity is not secured on any assets although part of the non-equity funding package provided by the private equity firm may seek some security. Therefore, private equity firm has the same risk of failure just like the other shareholders. Private equity firm is an equity business partner and is rewarded by the company’s success. This reward is usually achieved through realizing capital gain.