In general, private equity funds are characterized by making available their investor’s resources for a limited period of time (usually less than 10 years) and the investees use them for an even shorter period of time. During this period, these companies need to maximize their profits to cover for the management costs and return substantial profits to their investors.
In order to achieve this, they can choose between two possible strategies:
- Leveraged finance: consisting of bringing the company into debt in order to buy it for a lower amount and then make the acquired company pay off all or part of the debt in order to sell it with little debt for its total amount.
- Business exponential growth while using their own capital.
The first type of strategy is possible in the case of big companies that have a recurrent cash flow. With regard to smaller companies, the second strategy is advisable, whether for venture capital operations (for start-ups) or growth operations of medium companies. In these particular cases, there is interest in developing the investee company as fast as possible and, in many cases, going global is the way to do it. However, the issue with this growth strategy is that it can brutally reduce the investee’s profitability.
For this reason, PEO services are a great opportunity for investee companies funded by venture capital, since they provide great flexibility when going global.
Some of the benefits of PEO arrangement are:
- It allows the company to hire teams in different countries in a very flexible manner.
- There is no need to set up a subsidiary or a branch while there is no permanent establishment. Even when a permanent entity is needed in foreign countries, starting to operate through a PEO company facilitates the initial creation and consolidation of a local team.
- It simplifies management structure, since there is no need to have local HR teams.
- It eliminates accounting complexities of each foreign country and the local administrative obstacles.
- It can leave the non-core services out of the company’s payroll.
- The company can focus on the teams’ operational control.
All these factors have a positive impact on the effectiveness, speed and flexibility needed to carry out the accelerated development that venture capital funds require from their investee companies.