A beginners guide to private equity – Definition, fund and PE Firm

Private Equity firms pool money from number of investors in order to fund or acquire stakes in established companies. In short its known as “PE firm”. Private equity is the fund that these PE firms collect from investors and invest in companies.

Here is a list from where PE firms are generally collecting money to invest;

  • Wealthy individuals
  • Investment banks
  • Insurance companies
  • Financial institutions
  • Pension or other funds

These PE firms are managed by managers who generally handles the asset under management within the funds. Investors who invest into the funds are known as limited partners and the fund created is a limited partnership.

Investors in a PE firms are putting their money for a long term to form a specific fund. After achieving their fundraising target, they close that fund and invest capital in private companies.

PE firms can also buyout a public company by buying entire shares outstanding and make it a private company. As the name suggests, shares held by PE firms are private and not traded publicly in stock exchanges.

Private equity can be invested in several rounds. These PE firms fund a business through following ways;

  • Buy out a company or founder.
  • Cashing out existing investors.
  • Provide capital for expansion.
  • Provide cash to struggling business with good prospects.

The structure of the private equity may vary. They may purchase a significant amount of equity to have controlling stake or they may fund in combination of debt and equity.

These private equity firms make money for their investors by buying out companies and then help them increase their earnings to increase company’s value. After purchasing the business, that company becomes a portfolio company of the PE firm. To monitor performance, stimulate growth and to participate in decisions, these PE firms have their representative on the board of the company. New management can focus on cutting costs and jobs in order to improve efficiency of the company.

In certain cases, after having significant growth and improved earnings, private equity firms may take the company public with an IPO and get out with profit on their investments. They can also sell the company to another group of investors to make money.

When the fund makes profit out of selling its stake in the invested companies, they distribute returns to the investors in proportion to their stake.

Here are some of the world’s known PE firms;

  • TPG capital
  • Carlyle Group
  • Kohlberg Kravis Roberts
  • The Blackstone Group
  • Warburg-Pincus
  • Advent International
  • Apollo Global Management
  • EnCap Investments
  • Neuberger Berman Group
  • CVC Capital Partners

Private equity firms are different from venture capitalists as they only invest in private companies or in a public company to make it private. Whereas, a VC is interested only in startups.