Private Equity Firms
Today's business market is experiencing a boom in a sector of investment known as private equity. Loosely defined, private equity is concerned with the practice of a privately owned investment firm investing large amounts of capital in other companies, with the intent of eventually buying and selling them for a profit. As an enterprising business solution, private equity manages its investments through three general trends:
- Taking a company public through an IPO (initial public offering)
- Selling or merging the company through an acquisition
- Recapitalizing through a buyback program or large dividend among shareholders
Private equity firms seek opportunities in particular kinds of companies, namely venture capital companies that need investment to engage the market, companies that are looking to merge or be acquired by larger companies, or companies that are in special situations of distress.
In venture capital, private equity firms fund the innovation of a new or small enterprising company looking to emerge into a large market. Because they are new, venture capital companies require funding from investors, which private equity firms provide for companies that show promise and can return on their investment by following one of the trends described above.
For acquisitions, the private equity firm plays the role of funder, facilitator, and partial owner. Companies who are moderately successful often get bought out by larger companies whose resource capability and capital can be leveraged to turn an even greater profit. However, the process of acquisition requires funding that usually results in a change of ownership. When private equity firms step in to facilitate an acquisition process, they receive a return on their investment at the completion of the process by gaining a majority control of a portion of the more mature company. These buy-out deals run in the tens of billions.
When a company is in a special situation of distress, private equity firms can contribute investment capital to leverage change that will turn the company around or rescue it through recapitalization or a special opportunity event. This is done with the intent of eventually still selling it off, either to another company in the private equity firm's portfolio, another private equity firm, or the public through an IPO.
Private equity can be incredibly lucrative, but requires a certain degree of risk. Private equity investments are typically long term investments involving a significant amount of capital, beginning roughly at $1,000,000. These funds can be locked in investment for a short time or over a decade, which means that the investor must be cabable of subsisting without needing to touch what they have invested. As with any investment, private equity investors must be able to withstand losing significant amounts of money. Private equity investors are typically institutions or individuals with a net worth of over $1,000,000 and an average income of $200,000 or more.
Risks in private equity investment are balanced by returns that have been calculated anywhere from 10 to 30%. Private equity has been shown to routinely outperform public equity. In addition, private equity operates under fewer restrictions and government mandated requirements than public business,
Private equity is becoming very attractive to successful business managers looking for a change in their career. Private equity companies invest in good management and offer attractive incentives to encourage high performance. Thus, many high performing managers have been lured to the private equity business because of the opportunity private equity provides, namely that working hard in private equity results in more personal gain than public equity.
Examples of Private Equity Firms operating in America include:
|
