Private Equity

What is a Private Equity firm?

What does it do?

A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of start-up or operating companies

It does this through a variety of investment strategies including leveraged buyout, venture capital, and growth capital.

Often described as a financial sponsor, each firm will raise funds that will be invested in accordance with one or more specific investment strategies.

Typically, a private equity firm will raise pools of capital, or private equity funds that supply the equity contributions for these transactions.

Private equity firms will receive a periodic management fee as well as a share in the profits earned from each private equity fund managed.

Private equity firms, with their investors, will acquire a controlling or substantial minority position in a company and then look to maximize the value of that investment and they generally receive a return on their investments.

How do they get their investment back?

They get their initial investment back and potentially exit through one of the following avenues:

An initial public offering (IPO) — shares of the company are offered to the public, typically providing a partial immediate realisation of their initial investment as well as a public market into which it can later sell additional shares.

A merger or acquisition — the company is sold for either cash or shares in another company.

A recapitalization — cash is distributed to the shareholders (in this case the financial sponsor) and its private equity funds either from cash flow generated by the company or through raising debt or other securities to fund the distribution.

Private equity firms generally place investments in specific industry sectors or investment areas where they have expertise.

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