BROWSE

Private Equity

Definition

Private equity typically refers to investment funds organized as limited partnerships that are not publicly traded and whose investors are typically large institutional investors, university endowments, or wealthy individuals. Private equity firms are known for their extensive use of debt financing to purchase companies, which they restructure and attempt to resell for a higher value. Debt financing reduces corporate taxation burdens and is one of the principal ways in which private equity firms make business more profitable for investors. Private equity might also create value by overcoming agency costs and better aligning the incentives of corporate managers with those of their shareholders.

A private equity is a firm that generates capital investment by high net-worth individuals and firms. This capital is then used to invest in, and acquire, equity ownership in different companies and multiple businesses with a mission to sell each business, at a profit, within a few years.

The way a private equity firm works differs from a publicly held business. In publicly held businesses, stocks are listed on a public exchange and owned by a large number of people. However, stocks of a private equity firm are not quoted or available for public exchange.

In a private equity firm, investors make direct investments in private companies and conduct buyouts, hence delisting them from public equity.

Capital for a private equity is usually raided from institutional investors and retails. It can be primarily used to fund latest technologies, make business acquisitions, and even expand the working capital of an already owned company.

Majority of firms that are private equity based consist of accredited and institutional investors. This is typically because they have the financial strength and resources to invest money for long time periods. Unlike publicly held companies, private equity firms have long investment holding periods where the investors work with sheer dedication to turnaround a distressed company for profitable sale.

Increasing Growth in the Number of Private Equity Firms

The private equity business market has been growing rapidly in size every since 1970. This market has attracted the best in the country, including top notch performers from companies listed in Fortune 500 and the elitist strategy & management consulting organizations.

Private Equity Firm- Fee Structure

The structure of fee of a private equity may vary from company to company. However, generally it may be broken down into 2 parts:

  • Management fee
  • And performance fee

Functions of a Private Equity Firm

The two main functions of a private equity firm are:

  1. Deal origination
    This involves building and maintaining relationships with potential M&A intermediaries, high net-worth individuals and investment banks. This helps ensure smooth transaction execution.
  2. Portfolio oversight
    Helps introduce new and best practices for strategic planning & financial management and even institutionalize latest accounting, IT and procurement systems for boosting the investment value.

Further Reading


The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle
www.sciencedirect.com [PDF]
This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small …

Equity ownership concentration and firm value: Evidence from private equity financingsEquity ownership concentration and firm value: Evidence from private equity financings
www.sciencedirect.com [PDF]
This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small …

The economics of the private equity marketThe economics of the private equity market
heinonline.org [PDF]
This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small …

Does legal enforcement affect financial transactions? The contractual channel in private equityDoes legal enforcement affect financial transactions? The contractual channel in private equity
academic.oup.com [PDF]
This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small …

The economics of private equity fundsThe economics of private equity funds
academic.oup.com [PDF]
This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small …

Leveraged buyouts and private equityLeveraged buyouts and private equity
www.aeaweb.org [PDF]
This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small …

The role of private equity group reputation in LBO financingThe role of private equity group reputation in LBO financing
www.sciencedirect.com [PDF]
This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small …


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