Private Equity

Private equity is type of capital that is not listed on a public exchange. Therefore, Private equity firm manages equity securities (private equity) of companies that are 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 firm is usually made up of a small number of employees. It is able to maintain a small in-house staff because if often outsources a lot of the operational functions to other companies.

Private equity investments come from institutional investors and accredited investors, who can offer significant amounts of money for extended time periods. Mostly, 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.

private equity fund itself is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. These strategies are:

  1. Venture Capital – Venture capital is a growing asset class. It refers to investments made in startups and young companies with little to no track record of profitability and they are made with the goal of generating outsized returns by identifying and investing in the most promising companies and profiting from a successful exit.
  2. Real Estate – involves pooling together investor capital to invest in ownership of various real estate properties with four common strategies: Core- low-risk/low-return strategies with predictable cash flows, Core Plus- Moderate-risk / moderate-return investments in core properties that require some form of value added element, Value Added – a medium-to-high-risk / medium-to-high-return strategy which involves the purchasing of property to improve and sell at a gain, Opportunistic –A high-risk / high-return strategy, opportunistic investments in properties require massive amounts of enhancements.
  3. Growth Capital – Growth capital investments are made in mature companies with proven business models that are looking for capital to expand or restructure their operations, enter new markets, or finance a major acquisition. Typically, these are minority investments, and companies that take on growth capital are more mature than venture-funded companies.
  4. Mezzanine Financing – consists of both debt and equity financing used to finance a company’s expansion. With mezzanine financing, companies take on debt capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan isn’t repaid in a timely manner and in full.
  5. Leveraged Buyouts (LBO) – when a company borrows a significant amount of capital (from loans and bonds) to acquire another company.
  6. Special Situations aka Distressed PE – funds specifically target companies that need restructuring, turnaround, or are in any other unusual circumstances.
  7. Fund of Funds – A “fund of funds” (FoF) is an investment strategy whereby investments are made in other funds rather than directly in securities, stocks, or bonds.

Structure of private equity firms usually are not same but it includes management and performance fees. Some of the firms charge 2% management fee annually on managed assets and require 20% of the profits gained from the sale of company.

Private equity is type of capital that is not listed on a public exchange. Therefore, Private equity firm manages equity securities (private equity) of companies that are 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 firm is usually made up of a small number of employees. It is able to maintain a small in-house staff because if often outsources a lot of the operational functions to other companies.

Private equity investments come from institutional investors and accredited investors, who can offer significant amounts of money for extended time periods. Mostly, 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.

private equity fund itself is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. These strategies are:

  1. Venture Capital – Venture capital is a growing asset class. It refers to investments made in startups and young companies with little to no track record of profitability and they are made with the goal of generating outsized returns by identifying and investing in the most promising companies and profiting from a successful exit.
  2. Real Estate – involves pooling together investor capital to invest in ownership of various real estate properties with four common strategies: Core- low-risk/low-return strategies with predictable cash flows, Core Plus- Moderate-risk / moderate-return investments in core properties that require some form of value added element, Value Added – a medium-to-high-risk / medium-to-high-return strategy which involves the purchasing of property to improve and sell at a gain, Opportunistic –A high-risk / high-return strategy, opportunistic investments in properties require massive amounts of enhancements.
  3. Growth Capital – Growth capital investments are made in mature companies with proven business models that are looking for capital to expand or restructure their operations, enter new markets, or finance a major acquisition. Typically, these are minority investments, and companies that take on growth capital are more mature than venture-funded companies.
  4. Mezzanine Financing – consists of both debt and equity financing used to finance a company’s expansion. With mezzanine financing, companies take on debt capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan isn’t repaid in a timely manner and in full.
  5. Leveraged Buyouts (LBO) – when a company borrows a significant amount of capital (from loans and bonds) to acquire another company.
  6. Special Situations aka Distressed PE – funds specifically target companies that need restructuring, turnaround, or are in any other unusual circumstances.
  7. Fund of Funds – A “fund of funds” (FoF) is an investment strategy whereby investments are made in other funds rather than directly in securities, stocks, or bonds.

Structure of private equity firms usually are not same but it includes management and performance fees. Some of the firms charge 2% management fee annually on managed assets and require 20% of the profits gained from the sale of company.