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02 Mar, 2018

Investopedia: What is Private Equity?

Investopedia: What is Private Equity?

Private equity is capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.

Private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods. In most cases, considerably long holding periods are often required for private equity investments in order to ensure a turnaround for distressed companies or to enable liquidity events such as an initial public offering (IPO) or a sale to a public company.

Since the 1970s, the private equity market has increased enormously. Pools of funds are sometimes created by private equity firms in order to privatize extra-large companies. A significant number of private equity firms perform actions known as leveraged buyouts (LBOs). Through LBOs, substantial amounts of money are provided in order to finance large purchases. After this transaction, private equity firms attempt to improve the prospects, profits, and overall financial health of the company, with the ultimate goal being a resale of the company to a different firm or cashing out through an IPO.

The fee structure for private equity firms typically varies but usually includes a management fee and a performance fee. Certain firms charge a 2% management fee annually on managed assets and require 20% of the profits gained from the sale of a company.

Read more about M&A: DD Check List, Mandate F. A. Q.

Company Valuation: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8

Some ideas about capital-raising strategies: Bringing Your Company Public, Exploring Alternative Capital-Raising Strategies, Refinancing and Minority Equity as Partial Exit Strategies, 5 Alternatives To IPOs, How to Raise Capital For a Company in Financial Troubles, 7 Private Equity Strategies

Investopedia: Mezzanine financing, Equity financing, Debt financing

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