Private Equity Explained
Private equity is a general term used to describe all kinds of funds that pool money from a bunch of investors in order to amass millions or even billions of dollars that are then used to acquire stakes in companies.
A team of investment professionals from a particular private equity firm raise and manage the funds, where they utilise this money for raising new capital, future acquisitions, funding startups or new technology, investing in other private companies or making the existing fund stronger. Private equity funds represent an excellent opportunity for a high rate of return.
Moreover, Private equity is ownership or interest in an entity that is not publicly listed or traded. A source of investment capital, private equity comes from high-net-worth individuals and firms that purchase stakes in private companies or acquire control of public companies with plans to take them private, eventually delisting them from stock exchanges. The private equity industry is comprised of institutional investors such as pension funds, and large private equity firms funded by accredited investors.
There are many companies that, if not for private equity, would not be able to get access to the kind of capital they need to scale, to transform, to turn around, and to have succession planning.
Most often, private equity companies follow the strategy of investing long term in a private business or company and taking a controlling stake in that entity. This gives them the ability to have managerial say in the operations of the business. Sometimes they may even buy 100% of the target company and complete takeover.`
Private equity funds might invest in companies for a period of up to ten years or even more, so in short, they are often focused on long term investments. The term private equity can encompass a lot of different types of firms, including venture capital firms and hedge funds
As a result, funds have more control over the outcome of their investment. It can increase their likelihood of seeing positive returns for their fund participants.
With funds under management already in the trillions, private-equity has become an attractive investment vehicle for wealthy individuals and institutions. Understanding what private equity exactly entails and how its value is created in such investments are the first steps in entering an asset class that is gradually becoming more accessible to individual investors.
There are various reasons why a private equity fund may buy a stake in a particular business. A target company may have a great idea for a product or service, presenting a great investment opportunity. But the target may lack the capital to realize that great product or service without investment from a fund.
Another reason is that a particular company may be in poor financial shape but have particular assets that could be extremely lucrative. The fund can try to turn the company around or make use of those particular valuable assets in rebuilding the business.