Private Equity

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Private Equity articles, news and information

Private equity is an investment vehicle that allows companies to raise capital by selling shares to investors. Learn more about private equity and its potential impact on your business.


What Is Private Equity?

Private equity describes investment partnerships that buy and manage companies before selling them. Private equity firms operate these investment funds on behalf of institutional and accredited investors.

Private equity funds may acquire private companies or public ones in their entirety, or invest in such buyouts as part of a consortium. They typically do not hold stakes in companies that remain listed on a stock exchange.

Private equity is often grouped with venture capital and hedge funds as an alternative investment. Investors in this asset class are usually required to commit significant capital for years, which is why access to such investments is limited to institutions and individuals with high net worth.

How it works?

Investment managers will invest in companies where capital and management resources can be effectively allocated towards developing new products or services, expanding operations or turning around a distressed business to ultimately increase profitability and provide attractive returns. Depending on the fund’s specific objectives, management will focus on adding value to the company through restructuring, operation improvements, corporate governments and/or financial support.

Private equity funds can have varying strategies, with some operating in specific industries in which they can apply niche expertise while others invest in a broad range of industries to diversify their portfolio. Most private equity funds aim to deliver above average returns compared to traditional equity investments; however, investors must be willing to commit capital long term as the investment horizon is 5 to 7 years on average and funds are often closed-ended. These funds can also carry added risk as there is no guarantee as to the financial performance of the companies invested in.

At the end of the term, the fund will sell the investment through an initial public offering, a backdoor listing, a sale to a third party or a share buyback, at which point the investor receives any capital and profit from the fund.

Why It's relevant to Scale-ups

By the time a private equity firm acquires a company, it will already have a plan in place to increase the investment's worth. That could include dramatic cost cuts or a restructuring, steps the company's incumbent management may have been reluctant to take. Private equity owners with a limited time to add value before exiting an investment have more of an incentive to make major changes.

The private equity firm may also have special expertise the company's prior management lacked. It may help the company develop an e-commerce strategy, adopt new technology, or enter additional markets. A private-equity firm acquiring a company may bring in its own management team to pursue such initiatives or retain prior managers to execute an agreed-upon plan.

The acquired company can make operational and financial changes without the pressure of having to meet analysts' earnings estimates or to please its public shareholders every quarter. Ownership by private equity may allow management to take a longer-term view, unless that conflicts with the new owners' goal of making the biggest possible return on investment.

Bottom line

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