Companies issue stock to be traded in the public financial markets as a means to raise capital or money, but there are situations in which it is more prudent for that entity to go private. Going private means that the majority of shares in that company are no longer available to be traded in the public markets. Instead, there might be another entity, such as a private equity firm, that has obtained a majority and controlling stake in the company and in its profits. In other cases, a company will simply exit the public markets on its own.
When a once-public company is purchased by a private equity firm, the deal is often done as a leveraged buyout (LBO). The leverage refers to the amount of debt that the private equity company takes on to make the acquisition. Often, it is very large companies going private, and as a result, these transactions can be too expensive for any firm to achieve using cash. When a public company is taken private by a private equity firm, there usually is an intention to reintroduce the company to the public markets at a later time. This is known as an exit strategy, and the average time that a private equity firm will own a company in its portfolios of holdings is five to seven years.
The reasons for going private in the first place will vary. For instance, investors might not value a particular stock the way that a company's management team thinks they should. Going private eliminates some of the risks, challenges and uncertainties that are inherent in the public markets.
Another reason a company might go private is to improve its business model. By being taken private by a private equity firm, that company gains access to the capital and expertise of the new management company. As a result, the business can be improved or expanded, which can result in a better experience in the public markets at a later time.
Going private also means that a company is relinquished from some of the disclosure restrictions required by the regulatory body in the region. This can help with expenses, because costs associated with filing with such an agency can be high. By going private, a company's management team is no longer required to disclose some of the financial details that must be shared with public investors.
Not every acquisition of a public company to a private entity is a friendly one. If a large investor is able to make the acquisition with the support of a company's board of directors even if the management team of the target company is not on board, the deal can still happen. As a result, the executive team might not remain intact after the company has gone from being traded publicly to being a private entity.