What is Private Equity?
It refers to investment funds organized as limited partnerships that are not publicly traded, whose inventors derives from high net worth individuals and firms that purchase shares of private companies or acquire control of public companies with plans to take them private, eventually become delisting them from public stock exchanges. Partners at private-equity firms raise funds and manage these monies to yield favorable returns for their shareholder clients, typically with an investment horizon between four and seven years.
Types of Private-Equity Firms
Some are strict financiers – passive investors – who are wholly dependent on management to grow the company and supply their owners with appropriate returns. Other private-equity firms consider themselves active investors. They provide operational support to management to help build and grow a better company. These types of firms may have an extensive contact list and “C-level” relationships, such as CEOs and CFOs within a given industry, which can help increase revenue, or they may be experts in realizing operational efficiencies and synergies.
Why Invest in Private Equity?
Institutional investors and wealthy individuals are often attracted to private-equity investments. Their money goes into pools that represent a source of funding for early-stage, high-risk ventures and plays a major role in the economy. Often, the money will go into new companies believed to have significant growth possibilities in industries such as: telecommunications, software, hardware, healthcare and biotechnology. Private-equity firms try to add value to the companies they buy, with the goal of making them even more profitable.
What Are the Benefits of Private Equity Financing?
Private equity can provide by far the largest amounts of money. Private equity firms are much more hands on, and will help re-evaluate every aspect of the investors’ business to see how they can maximize the value, can also result in major improvements. A 2012 study by The Boston Consulting Group found that more than two-thirds of private equity deals resulted in the company’s annual profits growing by at least 20%, and nearly half the deals generated profit growth of 50% a year or more.
Is There Any Risk in Private-Equity Investing?
There are several key risks in any type of private-equity investing. As private-equity investing opens up to more people, the harder it could become for private-equity firms to locate good investment opportunities. Plus, some of the private-equity investment vehicles that have lower minimum investment requirements do not have long histories for investors to compare to other investments. Investors should also be prepared to commit their money for at least 10 years; otherwise, they may lose out as companies emerge from the acquisition phase, become profitable and are eventually sold.