When a business is set up, there are two main things it does. One is providing income to its employees and the other is an investment for the business profit and growth.
Equity is an important criterion for the business and the investment world. Equity means the ownership of shares in a company. These assets or shares might also come up with debts or liabilities attached to them.
They represent the shareholder’s money in a company and would be returned to them in case all the shares get liquidated. There are two types of equity: private equity and public equity.
Private vs Public Equity
The main difference between private equity and public equity is that private equity means the ownership of shares in a private company while public equity means the ownership of shares in a public company.
The other differences in terms of their rules and regulations can be shown in the comparison table below.
Comparison Table Between Private and Public Equity (in Tabular Form)
| Parameter of Comparison | Private Equity | Public Equity |
|---|---|---|
| Definition | Shares or stocks in a private company representing your ownership are called private equity. | Shares or stocks in a public company representing your ownership are called public equity. |
| Information Privacy | Not obligated to publish information about their stocks. | Stock and financial information are released for the public. |
| Pressure | Investors can work on long-term prospects. | Investors work on short-term prospects because of public pressure. |
| Targeted audience | Targeted for individuals with high net-worth. | Targeted for the general public who can buy, sell, or trade these shares. |
| Regulation | Less regulated by organizations because they do not need to answer the public shareholders. | More regulated by government organizations because they disclose their information. |
| Trade of assets | They can trade among themselves or to the public but only after the founder’s consent. | Can trade these assets in the general population. |
What is Private Equity?
Private equity means your assets or security representing your ownership in a private company. Their financial information about stocks and shares is not disclosed to the public. A person having knowledge about investments or belonging to the business world can only speculate about their asset’s worth.
No governmental organization like Security Exchange Commission has any pressure on them that is why private equity investors can focus on long-term prospects about their assets.
This is also the reason they are less likely to be regulated by organizations or held accountable for their shares. The private equity industry is mostly made up of individuals with high net-worth or companies who purchase those shares of private companies.
If they need to buy, sell or trade those shares in any way, they can do so among the shareholders of the private company or the wealthy individuals of the general public but after the validation from the founder.
Two strategies are used for investing in the private equity firm. One is venture capital and the other is leverage buyouts.
In venture capital, they usually invest in young start-ups or less mature companies thinking that they have immense potential to rise in the industry. In leverage buyout, they invest in the target firms or buy them all together.
What is Public Equity?
Public equity means your assets or security representing your ownership in a public company.
This industry is heavily regulated by governmental organizations and is obligated to publish their financial information about their stocks and assets. Their finances, revenues, and everything is visible to the public.
Public equity investors also hold an annual meeting where they evaluate their performance and if it is not up to the mark, they can change the management and the results have to be declared publicly.
They have a huge public pressure on them that is why they only can work on short-term prospects. Their shares can be bought, sold, or traded in the public market. This process is defined as the Initial Public Offering (IPO).
This gives the right to an individual to hold a small share of the company from the public hence, making it public equity.
Since their shares can be sold to the general population, their stocks are a liquid asset. It can be sold within seconds in the market whenever they need the cash. The founder of Amazon, Jeff Bezos also used this strategy to turn Amazon into the world’s largest online retailer company.
Some risks also accompany this strategy like political situations and economic instability. If the stock values decrease in the market, it can put the companies at risk and their stocks lose their original value.
Main Differences Between Private and Public Equity
Some of the features that differentiate between Private equity and Public equity are given below:
- Private equity means your shares or stocks in a private company representing your ownership. Public equity means your stocks in a public company representing your ownership.
- Private equity investors are not obligated to publish financial information about their stocks whereas public equity investors are required to release their stocks and financial information for the public.
- Private equity investors can work on long-term prospects whereas public equity investors work on short-term prospects because of the public pressure.
- Private equity is targeted for individuals with high net-worth while public equity is targeted for the general public who can buy, sell, or trade these shares.
- Private equity is less regulated by organizations because they do not need to answer public shareholders whereas public equity is more regulated by government organizations because they disclose their information.
- Private equity investors can trade among themselves or to the public but only after the founder’s consent whereas public equity investors can trade these assets in the general population.
Conclusion
Private equity and public equity have their advantages in the investment world. Both are used in the finance expansion of their companies.
When companies want to avoid debts, they can sell their stock shares to gain access to large amounts to cash that can further be used in the business for growth.
References
- https://pdfs.semanticscholar.org/e5cd/72bee23ee5f69b77f83f51385c74b9e6a9ec.pdf
- https://ideas.repec.org/p/cir/cirwor/2005s-14.html
- https://academic.oup.com/rfs/article-abstract/23/7/2789/1589251