It is usually a big step for any company to be traded publicly. Essentially, this means that the company can expand its production activities since it has access to more capital resources. Companies that are publicly traded are able to limit the influence of other investors by retaining the major stakes. Elementarily, the larger the stake an investor has in a company, the greater their power in the affairs of the firm. In addition, having great power implies an investor has more control and influence in decision-making. However, not all investors acquire equity, shares or a stake in a company by directly buying publicly traded shares.
A private investor or group of investors can invest their resources in a company and acquire a huge stake or even the entire company without purchasing the publicly traded shares. Once this happens, the investor or group of investors is said to have a ‘private equity’ in the company. The investor with private equity has a lot of influence in the decision-making processes of the company. For instance, if they resolve to drop the production of a particular product or to source external funding to salvage a diminishing product, such a decision will be implemented. However, private equity poses several dangers to a company.
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Notably, the goal of every investor is to make a profit. Sadly, some investors have no concern for the well-being of a company so long as they reap their returns. Even if it means tearing the entire company into bits in order make it seasonally profitable, this is what will be done. In essence, this is the danger of private equity. Indeed, with private equity, the future state or performance of a company is not the primary issue. The immediate concern is to increase profitability even it is seasonal. Investors who acquire private equity in a company are similar to activist investors; who are often interested in seasonal profits. To this end, companies should avoid as much as possible to accord investors any form of private equity.
