Companies that use private equity are more flexible and have more fuel to grow faster
Raising capital in today’s economy is much more difficult than it was before the recession started. With the current economy most companies especially emerging and struggling companies experience more problems and take much longer in making a decision on how to raise capital. Emerging companies are taking longer to come public, secondary venture capital markets are increasing dramatically and late-stage private equity options are vast in number (Savitz & Albright, 2011, p. 10). Private money or in other words private equity is what should be used by this company. Private money is abundant and creating the opportunity for more innovation and faster company growth than ever before at a fraction of the risk and energy that comes with public markets (Savitz & Albright, 2011, p. 10). Companies that use private equity are more flexible and have more fuel to grow faster than competitors.
Especially because this is a struggling company and since this company’s product is two year away that will revolutionize how the industry does business which should make it a successful company. This is because private financing has a low disclosure policy. Private debt provides a channel in which information can be transmitted confidentially to the investor, theory indicates that it is cost efficient to issue private debt when the cost of public disclosure is substantial (Dhaliwal, Khurana, Pereira, 2011, p. 299). If the company was to go public than it would need to reveal the product to lenders, competitors will than find out what the product is and may build a similar product. The value of the product may be reduced if the company goes public because of the high disclosure policy. This would make the company not as valuable as it can be. Borrowing from insiders keeps the product information secret that would give a great advantage to any company especially this one.
Dhaliwal, D., Khurana, I., & Pereira, R. (2011). Firm disclosure policy and the choice
between private and public debt. Contemporary Accounting Research, 28(1), 293-330.
Savitz, E., & Albright, P. (2011, November). Raising capital in a choppy market: cash
remains king. Forbes.com, 10-10.