How Is Private Equity Different From Public Equity?

Investing in equity means owning a portion of a company. Private equity versus public equity refers to how the shares are traded and who may be eligible to purchase them. Many investors are more familiar with public equity, which is traded on a public exchange. Private equity cannot be sold on an exchange. In many cases, investors must meet certain qualifications in order to purchase it. 

All equity is not created equally. There are major differences in the way private and public equities are purchased, held, and sold. They require different investment strategies and play separate roles in a balanced portfolio.

Public Equity

If a company decides to "go public," they may hire an underwriter to evaluate the offering and to set the expected price of the stock.  This stock will be offered to investors once it is priced.  After it is priced, it is then listed on an exchange so that anyone may purchase the shares. The offering is priced based upon the value of the offering and how much interest the offering is likely to attract from both individual and institutional investors. After the stock officially opens on an exchange, the shares are free to trade and the price will fluctuate based on many factors, including supply and demand.

When corporations are publicly traded, they are required to make quarterly filings with the Securities and Exchange Commission. The company must publicly disclose its financial condition. If a company fails to accurately report their financial information, they could be misleading their shareholders, which the SEC takes very seriously. 

Private Equity

Private equity is a much more restrictive type of investment. When a company wants to raise money but cannot or does not want to go public, they may choose to offer private equity to qualified investors which is strictly defined by the SEC For example, your friend from college launched a start-up and they are raising funds. You could invest some of your money into their business in exchange for a specified portion of the ownership. If the start-up fails, you may lose all of the money you invested. But if the company is successful, your investment may be worth more than the amount you originally invested.

Private companies do not have to release their financial information to the public, only to their investors. 

Making Shareholders Happy

Another difference between private and public equity is the amount of people the leadership of the corporation needs to please. A private company usually has a smaller number of people who are shareholders and tend to have a desire to see the company grow exponentially. Private equity investors are sometimes less interested in an immediate return on their investment purchase and more interested in seeing it grow over time.

Public companies, on the other hand, usually have a much larger pool of shareholders who may put pressure on leadership to see a current return on their investment. This often means making decisions between what will be best for the investors and what will be best for the company. For example, a company might decide to release a dividend to please the shareholders instead of investing that money back into innovation which could make the company more profitable in the future.

Public Vs. Private Equity

It is a common misconception to assume that all large companies are publicly-traded while all small companies are private. A corporation can also decide that it no longer wishes to be publicly traded. In other cases, companies become private after being acquired.

Public equity is more liquid than private equity and is available to anyone who wants to purchase shares. The two types of assets are managed with different strategies and target different investor goals and objectives.