Private Equity vs Public Equity: What’s the Difference?
When private equity and public equity are compared, many differences set them apart. These differences affect the way both operate and how they should be used. It is important to know these major differences between private and public equities before deciding which one is right for you.
Read on to learn more about private equity vs public equity.
What Is Private Equity?
Private equity refers to the private ownership of a company. In private equity, there are few retail investors. Usually, only institutions and private individuals can buy private equities. Once you own private equities, it is almost impossible for anyone else to acquire these shares from you unless you transfer them legally.
What Is Public Equity?
Public equity refers to shares of stock in a company that are issued and traded on the open market. When public, these stocks can be bought or sold at any time without requiring a broker.
Difference Between Private and Public Equity
Knowing the difference between private and public equities can help you decide which one is right for your investment needs. The main differences between private equity and public equity are as follows:
When private equity is offered to investors, they take the company private and become owners of a private company. This means that the private equity group has full control over how to use the invested money. They can now restructure or revamp any area of the business as they please.
Private companies are not accountable to anyone since it was taken private by private equity groups.
On the other hand, public companies have hundreds and thousands of stockholders who like to monitor every move made by management for their own protection. These stockholders hold corporations more accountable than private companies. They want all information provided at all times so they know where their investment stands with factors such as earnings per share and revenue.
Private equity depends on the value of a company and the profits it makes. This will depend on how private equity professionals determine what they can sell it for.
The private equity firm will base their valuation off of what they feel it should sell for at that time. And this directly affects how much profit they will receive from the private equity investment.
Public equities are based on supply and demand as well as earnings data. These factors result in each public stock having a specific price called the market price.
The market price changes depending on many factors, such as economic conditions and inflation rates. It’s also affected by news stories related to the company or the industry it is in.
Private equity firms are getting paid for managing private equities. So they do take a share of the profits. As a result, private equity firms may be less accountable than public companies.
Public equity depends on how much an investor wants to invest in a company. It does not involve any management fees or other hidden expenses.
This lack of accountability makes private equity riskier than public equities.
The Risk Level
Because private equities are not as regulated as stocks, private equities risk can be higher than public equities. There’s also a greater possibility that private equity can lead to bankruptcy and financial loss when compared with a listed stock investment.
And that’s because private equities are private. This means that the private equity company will not have to report losses or profits to anyone. There’s also no requirement for them to provide financial statements or other types of proof to anyone.
If private firms and private equity funds go bankrupt, then they can take you down with them. This is because private equity firms often have investors connected to the private equity company itself.
There’s little risk of losing all your money as an investor when it comes to public equities, even if the company you invested in goes bankrupt.
However, it’s very hard for an accreditated investor to own any private stocks that could cause bankruptcy. That means it’s much harder for private investors to lose their assets when compared with a public listed stock investment.
Types of Equity Available Investors
The private equity markets are full of companies that are privately held. But even private equities can be broken down into venture capital and private equity firms. This is an important distinction in private equities because most private equity is based on venture capitalists and private equity firms.
There are very few private investors who hold shares in private companies. Not unless they work for the company directly or have a close relationship with the company’s owner.
Public stocks can include blue-chip, mid-cap, large-cap stocks, and small-cap stocks. The list goes on depending on what type of public stock you want.
The market is full of choices for public stocks because there are so many types available.
How They Are Traded
Private equities are private, and therefore private equities are not available to the public for investment. As a private investor, you can only invest in private companies by investing directly into private equity funds or venture capital firms. But when it comes to public stocks, they are available through stock exchanges anywhere in the world.
Although not every private investor has the means to make private equity investments, this does not mean that they should entirely give up on private equities. Their best bet for private company businesses is buying private shares through a private stock exchange platform. This way, they can invest directly in private companies without relying on relationships with venture capitalists and private equity firms.
Check out this private equity platform for more information.
Private Equity vs Public Equity Differences Outlined
Private equities and public stocks both have their own place in investments. When choosing between private equity vs public equity, it’s important to know the differences between private and public so that you stay within your investment goals.
We hope you enjoyed learning some private equity vs public equities differences as much as we did putting this article together. And if you’re interested in reading more interesting content, check out our other articles.