Public Equity vs Private Equity: How Do they Differ?

The terms “public” and “private” refer to how broadly this ownership is dispersed. This means that public equities are stocks that are traded on the open market on an exchange, such as the New York Stock Exchange; on the other hand, private equities are stocks that are traded privately and not distributed to the public. In this article, we will compare and contrast public equity and private equity since they are very important in gaining insight into the nature of the financial markets. Let’s get started!

Private equity and public equity

Private equity refers to buying a stake in a company’s ownership without going through an initial public offering. In other words, the transactions are private and not open to the public; hence, the name “private equity”. On the other hand, public equity refers to buying shares in companies that can be traded on stock exchanges, such as NYSE. When companies are publicly traded, they tend to be relatively liquid; that is, it’s easier for the market to buy and sell their common stock at any time during the trading day.

As we know, private equity is mostly used to accumulate large stakes in a company wherein investors such as private equity funds, hedge funds, and institutional investors make private transactions in order to facilitate a large positive return on investment. While public equity is also used to accumulate large stakes in a company, it is used so that the shares can become liquid and tradable in the open market as this tends to be easier. Let’s dive a bit deeper into each of these terms.

What is private equity?

Private equity means investment funds that are managed by limited partners, and the main goal of such funds is to generate large financial returns in the long term. Typically, angel investors, hedge funds, private equity funds and venture capitalists invest in private equity, and these entities are considered to have a competitive edge over other investors because of their superior access to the market. These investments are not available to the public, and therefore, private equity is considered to be one of the most secretive forms of investing in the financial markets.

How does private equity work?

Private equity investments are typically in the form of venture capital, growth equity, buyouts, and so on. Essentially, these investments are made in a company with the goal of restructuring its management, business, and operations so that it can become more profitable and generate financial returns for the investors. The mechanism of private equity enables investors to obtain large stakes in the company, in return for which the investors provide capital.

Typically, these investments are high-risk and asymmetric, which means that the returns are high, but the risks are potentially large. Furthermore, the investors in this type of investment typically play a key role in the management of the company, provide guidance on the financial, legal, and tax matters, and plan for the direction of the company to ensure that the financial returns are maximized.

Types of private equity

There are several types of private equity investments that are used to streamline the operations of companies and accelerate their growth. The following are the most common types of private equity investments:

• Venture capital – The investors provide capital to a company in its early stage of development, and the objective is to encourage and support the company’s growth. Venture capital companies provide capital in exchange for a high equity stake in the company. As such, they have a vested interest in the growth of the company and are thus committed to giving guidance to management, improving performance and monitoring for the long-term.
• Funds of funds – Funds of funds are a multi-manager investment that is made up of other investment funds that are managed by professional asset managers who manage them on behalf of their clients. They invest in many venture capital funds and private equity funds, which may be established and sponsored by other institutions such as banks, insurance companies, or pension funds. The investments are pooled together and overseen by a general partner who manages the entire portfolio of the fund.
• Growth capital – As the name suggests, these investments are made to facilitate growth in the company. A growth capital investment is typically made when the size of the business is relatively large, and the nature of the investment is therefore geared to facilitate the expansion of the company and its operations. This helps to accelerate the growth of the company, and the goal is to make a return on investment from this growth.
• Real estate – This type of private equity investment facilitates the acquisition of real estate assets so that they can be managed and developed by the company. To facilitate the company’s growth and generate large financial returns, real estate investments are made so that the company can acquire new offices or industrial space in locations with a high potential for growth.
• Buyouts and leveraged buyouts – Buyouts are used to make investments in a company by taking a controlling stake in the company. As such, it helps to manage the operation of the company and drive its growth. While leveraged buyouts are used as a strategy for buying companies through borrowing high amounts of debt.

Pros and cons of private equity

Private equity is an exciting and potentially lucrative type of investment; however, it is not without risk. Due to the nature of private equity, the investments tend to be high-risk, which means that the returns are potentially high, but there’s also a large risk of loss. Here are a few of the pros and cons of private equity:

Pros:

• Investors and managers typically have a vested interest in the financial performance and growth of a company, which means that they are committed to giving guidance and advice so that the company can grow and succeed.
• A private equity investment provides a means for investors to make a long-term commitment to the company, which can help to create a stable relationship.

Cons:

• As private equity funds are typically used to acquire larger stakes in companies, the dilution of ownership can end up reducing the value of your holding in the share price. The greater the number of private equity investors, the greater the risk of dilution.
• As investors have a higher degree of control over the company, they tend to intervene in the management of the company, which can interrupt and slow down the operations of the business, leading to lower productivity and growth.

What is public equity?

Public equity refers to shares that are publicly traded. This means that they are available to the public and can be bought and sold on a stock exchange by any individual, investor, or trader. As a matter of fact, public equity is the most popular form of investment and is considered to be the most transparent form of investing in the financial markets.

The main reason for this is that investors, traders, and financiers can purchase and sell shares without any restrictions. This is because all shares are being monitored by the stock exchange in which they are traded and traded regularly.

How does public equity work?

The basic principle of public equity is that investors and traders can freely purchase and sell stocks on a stock exchange. Basically, any individual can purchase a stock, which gives them the right to own a stake in the company. However, investors do not have any control over the company until they acquire significant shareholdings in the company. To better understand the concept, consider the following example:

Assume that an investor wants to buy some shares of ABC Company. The stock is trading in the market at $100 per share, and the investor wants to purchase 10,000 shares. To make an order, the investor registers (opening a Demat account) with one of the stock exchange platforms and places an order for 10,000 shares at $100 per share. When the order is registered, the investor receives an order confirmation, the shares are credited to the Demat account, and the order is executed. Once the order has been executed, the investor can sell the shares in an open market trading session if they wish to sell.

Types of public equity

Public equity has two main types: the common stock of a company, known as equity shares, and preferred shares. The following are the types of public equity:

• Common stock – Common stock is the most popular form of public equity that refers to a security issued by a company. It provides the investor with voting rights, typically, one vote per share. With voting rights, the corporate stockholder can elect board members of the company.
• Preferred stock – Preferred stock is a type of security that acts as an investment in a company. Unlike common stock, preferred stock gives the investor a set dividend, which is typically paid out before the common stockholders can claim their payment. However, voting rights are not available with preferred stock.

Pros and cons of public equity

Public equity has a number of opportunities for investors, traders, and financiers. However, it also has many risks associated with it. Here are some of the pros and cons of public equity:

Pros:

• The ease of execution with public equity is one of its greatest benefits. Because the transaction is done through a stock exchange, the process is simple and straightforward. In essence, anybody can buy and sell stocks on any stock exchange.
• In order to maintain corporate identity and recognition, companies can gain publicity through public equity. This means that the company can be easily identified through the shares traded.

Cons:

• Public equity has a wide range of trading opportunities. As such, many shares are listed on several stock exchanges, so investors can own an abundance of shares in different companies. This can lead to excessive market fluctuations and volatility in the pricing of individual stocks resulting in a lack of stability for investors.
• A company’s financial reporting can be subject to more scrutiny and regulation as it is publicly traded. This can lead to extensive reporting requirements and interests from the regulators to monitor the company’s performance and financial records.

Public equity vs private equity

Now that you understand the basic principles of public equity and private equity, you are probably wondering how they compare. In order to help you make a better and more informed decision, it is important to understand the difference between private equity and public equity. Following is a table that compares the two:

Key differences between public and private equity

Parameter of Comparison	Private Equity	Public Equity
Liquidity	The liquidity is considerably lower because the horizon of investment in private equity is longer; hence, investors can hold the shares for a considerable period of time.	The shares are regularly traded on a stock exchange, making it very liquid, and investors can easily buy and sell shares.
Investors	There are limited investors in private equity as the deals are limited, and there is no element of public scrutiny involved.	The number of investors in public equity is large as the companies are listed on stock exchanges.
Privacy	With no obligation to disclose any information, private equity transactions offer complete privacy.	When a company is listed on any stock exchange, there is a need to meet certain regulations and disclose information regularly.
Pressure	There is no pressure involved in private equity, and thereby, it is easy to focus on long-term goals.	There is constant pressure on equity shares as financial results are reviewed and scrutinized regularly.
Target	The target investors of private equity are typically high-net-worth investors.	The general public is the target of public equity, and that is, shares are traded on stock exchanges.
Regulations	There are no regulations associated with private equity transactions as they are not open to the public.	Public equity is regulated by various laws and regulations.
Trading of assets	The assets are traded among the investors, and they can only be publicly traded after approval from the board of directors.	Since the shares are public and listed on stock exchanges, they can be traded freely.
Strike price calculation	409A valuation is conducted, and the strike price is determined.	The market forces determine the price of the share based on which the strike price is derived.

Manage your equity with Eqvista!

The basics of public equity and private equity have been detailed, and the differences between the two have also been described. The consideration of private equity and public equity is widely dependent on the nature of your business. With proper planning, research and understanding, you can make the right decision and choose the right form of equity to invest in. Eqvista is here to help you manage your company’s equity and shares. Get in touch with us today for more information.