Public vs. Private finance…The question is, which option is better, and why? Entrepreneurs, investors, and advisors have very strong opinions as to whether you’re better off with private equity or an IPO when seeking to finance, sell, or otherwise seek investment capital for your company. In today’s post, I’ll share some recently released information that may help you make the right decision…
If you are successful in your entrepreneurial endeavors, you will someday likely find yourself at a crossroads where you attempt to cut through the ambiguity of public sentiment and conflicting opinions and find the answer to the age-old finance debate of public vs. private equity.
The good news is that the results of a recent study by Ernst & Young concluded that businesses who received capital from investment firms substantially outperformed those who companies who received capital from the public markets.
The E&Y report which derived its conclusions from studying the track record of the global buyout industry’s 100 largest exits last year found that the enterprise value of companies funded by private equity was twice that of publicly-held companies. Moreover, the report found that the EBITDA of companies who received private equity investments increased by more than 30% over that of their public company counterparts. Another meaningful difference between companies who received private equity was that the primary driver of value creation came via organic growth initiatives, whereas the public companies most often had an acquisition-based model as there primary value creation driver.
In a previous post entitled “Capital vs. Influence“, I made the case for seeking value-added investment partners. The E&Y report seems to support my conclusions. The simple truth is that private equity investors stay engaged post-funding, and add ongoing value to the enterprise. Contrast this with the IPO process which is a long, costly, and heavily regulated endeavor where the value adds of your investment banking relationship largely disappears once your offering has hit the market.
Let me pose one final question…when determining the future of your company do you really want to hand it over to the regulatory and compliance ridden world of public finance, where your destiny is largely placed in the hands of analysts who assess whether your short-term performance is in alignment with Street expectations? From my perspective, I would choose to seek capital from a world that focuses on the creation of long-term value through an engaged and proactive process that adds value beyond just the original investment.
