Table of Contents
- What Is Debt Financing?
- What Is Equity?
- What is the Difference between Private Equity and Public Equity?
- 1. Who Can Invest in a Company?
- 2. When Can Investors Sell Shares Again?
- 3. How Do Investors Have a Say?
- 4. How Must a Company Provide Information?
- 5. Which Companies Raise Equity?
- What Are SPACs?
- Sparks – the New Segment for SMEs on the Swiss Stock Exchange
What Is Debt Financing?
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.
What Is Equity?
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.
What is the Difference 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:
1. Who Can Invest in a Company?
Sources ofequitycan 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.
Private Companies
Often only a minority consisting of private investors and investment companies can invest.
Investors
Publicly Traded Company
The public at large can acquire shares in a company.
2. When Can Investors Sell Shares Again?
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.
Private Companies
The investment horizon usually stretches over several years, during which time the shares are prohibited from being sold.
Liquidity
Publicly Traded Companies
Shares can be bought and sold at any time via a stock exchange.
3. How Do Investors Have a Say?
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.
Private Companies
Investors have a say and frequently are involved in strategy development.
Interaction
Publicly Traded Companies
Investors remain passive owners and at the most have a say at general shareholders’ meetings.
4. How Must a Company Provide Information?
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.
Private Companies
There is no information disclosure obligation.
Information
Publicly Traded Companies
All relevant information must be publicly disclosed.
5. Which Companies Raise Equity?
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 Companies
Private equity typically flows to companies that are still in an early growth stage.
Point in Time
Publicly Traded Companies
Established companies typically aspire to go public.
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. Since December 6, 2021, SPACs can also be listed and traded on SIX Swiss Exchange. At the same time, special market segments for SMEs – such as Sparks from SIX (see box in grey below) or BME Growth – make it more attractive for companies still in a growing stage to go public. There currently are more than 30 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.
Image source: Bandersnatch/shutterstock.com
What Are SPACs?
A special purpose acquisition company (SPAC) is a corporation without active business operations that is founded through an initial public offering. The objective of this “corporate shell” is to use the capital raised through the IPO to acquire a privately held company. The identity of the takeover target is usually unknown at the time of the founding of a SPAC, and investors must approve the proposed acquisition.
When a takeover occurs, shares in the SPAC are then converted into shares of the acquired company, which thus turns into a publicly traded company that thenceforth must meet all of the obligations associated with a listing. If an acquisition does not take place by a certain deadline (usually two years), the SPAC’s share capital, less any taxes, is returned to investors.
Since December 6, 2021, SPACs can be listed and traded on SIX Swiss Exchange. Authorization from all of the relevant authorities has been obtained. The new listing standard for SPACs caters for the specific characteristics of these vehicles while upholding an appropriate degree of investor protection.
Here you can find more information on SPACs on SIX Swiss Exchange.
Sparks – the New Segment for SMEs on the Swiss Stock Exchange
Going public on SIX Swiss Exchange doesn’t just stimulate the growth of SMEs, but also makes them sturdier during tough economic times. Companies now have a new quick way of raising capital, diversifying their sources of funding, optimizing their ownership structure, increasing their visibility to investors, and enhancing their credibility in the eyes of partners and customers.
Issuer requirements in the Sparks segment are less onerous than those on the main stock exchange. However, all companies listed on the Swiss stock exchange are subject to the same reporting requirements and the same regulatory oversight, which ensures transparency and investor protection in the Sparks segment as well.
Shares of newly listed SMEs that are in a growing stage generally have comparatively lower trading liquidity. Sparks takes this into account by concentrating trading into a condensed trading window, which enables investors to benefit from more efficient price discovery and improved execution of trades.
Sparks supplements the other services from SIX that are specially customized for SMEs. Those services include Stage, a program that supplies independent research to increase visibility, and Bridge, a service that links stock issuers with investors, as well as workshops and e-learning offerings.
Find out more about Sparks and discover how you can grow further after going public.
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