When a business is set up, it does two main things. One provides income to its employees, and the other is an investment for the business’s profit and growth.
Equity is an essential 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 if all the shares get liquidated. There are two types of equity: private equity and public equity.
Key Takeaways
- Private equity involves investment in privately-held companies not traded on public stock exchanges, while public equity refers to investment in publicly-traded companies listed on stock exchanges.
- Private equity investments often involve larger capital commitments, longer investment horizons, and more active company management involvement than public equity investments.
- Due to limited liquidity and higher risk, private equity investments are generally suitable for more sophisticated investors, such as institutional investors or high-net-worth individuals. In contrast, public equity investments are accessible to more investors.
Private vs Public Equity
The shares of a person in a private company is called private equity. In private equity, information related to stocks can not be shared with the public. There are two investment strategies in a private equity corporation. The shares of a person in a public company is called public equity. They can share their financial information with the public.
The other differences in terms of their rules and regulations can be shown in the comparison table below.
Comparison Table
| 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 to the public. |
| Pressure | Investors can work on long-term prospects. | Investors work on short-term prospects because of public pressure. |
| Targeted audience | Targeted at individuals with high net worth. | It targets 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. | They are more regulated by government organizations because they disclose their information. |
| Trade of assets | They can trade among themselves or with the public 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, which is why private equity investors can focus on long-term prospects for their assets.
This is also why they are less likely to be regulated by organizations or held accountable for their shares. The private equity industry is mainly made up of individuals with a 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 invest in young start-ups or less mature companies, thinking 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.
Governmental organizations heavily regulate this industry and must publish financial information about their stocks and assets. Their finances, revenues, and everything are 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 must be declared publicly.
They have substantial public pressure on them, so they can only work on short-term prospects. Their shares can be bought, sold, or traded publicly. 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 liquid assets. 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 weight.
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 supplies in a public company representing your ownership.
- Private equity investors are not obligated to publish financial information about their stocks, whereas public equity investors must release their stores and financial information to the public.
- Private equity investors can work on long-term prospects, whereas public equity investors work on short-term opportunities because of public pressure.
- Private equity is targeted at individuals with high net worth, while public equity is targeted at the general public, who can buy, sell, or trade these shares.
- Private equity is less regulated by organizations. After all, 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 only after the founder’s consent, whereas public equity investors can trade these assets with the general population.
- 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
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
