Private equity is a major part of our economy today. Private equity is capital that’s not publicly traded or listed. It is typically money from institutional investors like endowments, insurance and pension companies raised by private equity firms in the form of pooled funds to invest in private companies. There are a huge range of private equity firms and strategies from venture capital investing in early stage ventures, to middle market private equity investing in medium sized businesses, to big buyout firms focused on large investments in big established companies. Some firms only take control positions, others do minorities, some do both. Firms can also have specializations geographically and by sector. Many private equity firms use debt to enhance their returns but not to the same degree with big buyout firms doing large transactions and using more debt than other types of private equity.
Private equity firms are there to offer capital for investment but also cutting edge strategy and advice to their acquired companies. PE firms consider a few key elements when looking to acquire a company. The look into what the company does, what industry they’re in, the senior management, and the financial details of the company. Once the company is acquired value creation starts to take place. Value creation can come from enhanced growth strategies in sales, marketing and product development, internationalisation, cost efficiency improvements, acquisitions, enhancement of management teams, better working capital management, better use of and development of technology and many other areas. Unlike public markets where quarterly results can become of overwhelming importance private equity enables companies to take a 5 or even 10 year view of value creation. This may be why on most assessments private equity overall has generated higher returns than public equity.
Private equity firms range from venture capital to big buyout firms. Many of these firms specialise in a geographic region or industry. Private equity firms step in and offer their acquired companies excellent strategy and other advice. This value creation may look at marketing strategies, growth strategies, and even the enhancement of management teams.