Private equity

Private equity

Private equity is an important source of financing. It refers to the investment of funds in a company that is not publicly traded. Investors seek private equity (PE) funds to generate higher returns than those available from the stock markets. However, there are certain aspects of the sector that you must be aware of.  

Institutional investors, such as pension funds and major private equity (PE) companies supported by accredited investors, make up the PE sector. Due to the direct investment needed by PE, frequently done to obtain control or influence over a company’s activities, the industry is dominated by funds with large financial reserves.

What is PE?

PE typically refers to investment funds rather than individual investments. These funds are set up by PE firms, which raise money from investors and use it to buy stakes in companies. The firms then work to improve the performance of these companies and sell them for a profit.  

PE firms typically charge investors a management fee, as well as a percentage of any profits that are made. These fees can be quite high, which is why PE is often considered a high-risk investment. 

Understanding PE 

PE companies raise client money to start PE funds, run them as general partners, and manage fund assets in return for fees and a cut of earnings over a certain minimum or hurdle rate. 

When stock markets are soaring, and interest rates are down, PE investment becomes more lucrative and well-liked; conversely, when those cyclical elements become less favorable, they become less lucrative and popular. 

The money invested in PE funds has a limited duration of 7 to 10 years and cannot be withdrawn again after the first investment. After a few years, the funds usually start paying out rewards to their investors.  

Specialty of PE 

Some PE funds and businesses focus only on one type of PE investment. Although venture capital is sometimes referred to as a part of PE, its unique role and skill set it apart. They led to the emergence of specialized venture capital companies that now rule their industry. Other areas of specialization in PE are: 

• Investing in distressed situations and focusing on financially troubled businesses. 
• Growth equity invests in growing businesses after they leave the startup stage. 
• Experts in their fields, with some PE companies specializing only in energy or technology agreements. 
• Secondary buyouts entail the company’s ownership transfer from one PE group to another. 

• Carve-outs involving the acquisition of business units or subsidiaries. 

How does PE work? 

PE firms raise capital from institutional investors (such as pension funds, sovereign wealth funds, insurance companies, and family offices) to invest in private businesses, grow them, and then sell them years later to provide investors with higher returns than they can dependably expect from investments in the public markets. 

PE fund managers are typically very experienced and knowledgeable in the businesses they invest in. They work closely with the companies’ management teams in their portfolio to provide advice and guidance on improving performance.  

In many cases, the fund manager will also take an active role in the company’s management, working to implement changes to help the company achieve its growth potential. 

Who is a PE investor? 

A PE investor is an individual or firm that invests in companies that are not publicly traded. PE investors typically seek to invest in companies with the potential for high growth and need capital to finance their expansion. PE investors are typically willing to take on more risk than traditional investors, such as banks or insurance companies, in exchange for the potential for higher returns. 

PE investors typically invest through a private equity firm, a partnership that pools the capital of multiple investors. The PE firm then uses this capital to invest in companies that fit its investment criteria. The PE firm typically seeks to exit its investment within a few years through a sale of the company to another firm or through an initial public offering (IPO). 

Frequently Asked Questions