What is Private Equity and Public Equity

For the introduction of new products or the expansion of business activities, companies require capital. When companies need financing to expand a production site, for marketing or to increase staff, they can borrow debt capital. This so-called debt financing is usually offered by banks.

However, companies can also sell shares and thus create equity. In contrast to bank loans, companies do not have to pay back the capital they have raised to the investors. In return, the latter receive a percentage share in the company for investing and, if applicable, a right of co-determination.

A differentiation is commonly drawn between private equity and public equity.

When talking about equity a differentiation is commonly drawn between private equity and public equity.

The term “private equity” denotes shares of owner‑ ship in companies that are not (or not yet) listed on a stock exchange. The term “public equity” refers to shares of companies that already trade on a stock exchange.

We explain the five key differences between private and publicly traded companies:

Sources of equity can be, for example, family and friends, business angels, venture capital but also crowdfunding or accelerators. In all these cases, private equity is involved. The financiers – frequently including pension funds, insurance companies or sovereign wealth funds – invest in a private company. Public equity only arises when a company goes public, an Initial Public Offering. A company that is listed on a stock exchange can henceforth raise capital on the public market. Each person can then invest.

Investments in listed shares can be monetized at any time. A so-called secondary market exists. Investments in private companies are usually intended for a certain period of time. After that, there are various exit scenarios for the investors – for example, an Initial Public Offering.

When investing in private companies, it is not uncommon to have a say in strategy. The higher the stake, the greater the influence. As a shareholder in a listed company, you may have the right to vote at the Annual General Meeting.

A private company is – private. It does not need to provide information to anyone. Listed companies are quite different. They are subject to a disclosure obligation and must, for example, publish an annual and half-year report.

Venture capital and other types of private equity are investments that occur during the phases of a company’s growth. Companies that go public have already gone through several growth phases.

Private and public equity appear to have moved a bit closer together lately. Special purpose acquisition companies, or SPACs for short (see box in blue below), promise to accelerate and simplify the path to a stock exchange. At the same time, special market segments for SMEs – such as BME Growth, from BME  (see box in grey below) make it more attractive for companies still in a growing stage to go public. There currently are more than 132 companies listed on the BME Growth submarket alone, which is owned by SIX following its takeover of BME.

And going public also presents an opportunity to make incumbent investors’ shareholdings tradable. It turns private equity into public equity, coming full circle.