Private Equity

Private equity refers to a type of investment in which investors provide capital to private companies. Private equity firms raise funds from these investors and then use that capital to acquire, invest in, or provide financing for privately held businesses.

Examples

Some examples of private equity firms include:

The Blackstone Group

Founded in 1985 by Stephen A. Schwarzman and Peter G. Peterson
Headquarters: New York City, USA
Expertise in real estate investing
Assets Under Management (AUM): US$880.9 billion

Kohlberg Kravis Roberts (KKR)

Founded in 1976 by Henry Kravis, George Roberts, and Jerome Kohlberg Jr.
Headquarters: New York City, USA.
Pioneer of the leveraged buyout (LBO) industry
Assets Under Management (AUM): US$503.9 billion

The Carlyle Group

Founded in 1987 by David Rubenstein, William E. Conway Jr., and Daniel A. D'Aniello
Headquarters: Washington, D.C., USA
Focus on buyouts, growth capital, and distressed asset investments.
Assets Under Management (AUM): US$385billion

EQT Partners

Founded in 1994 in Sweden.
Headquarters: Stockholm, Sweden.
Strong presence in the Nordic and European markets.
Assets Under Management (AUM): US$239 billion

What is Private Equity?

Private equity companies, such as KKR, acquire businesses so that they can sell these businesses for a profit. To acquire them, they raise funding from high-value investors and the firm then manages these funds. Typically, this funding is complemented by borrowing.

Due to its relative novelty, this sector has experienced significant growth. As expected the popularity for investment in companies is greatest when the market is bullish - stock prices are high. It is up to the private equity firms to manage the companies well to ensure that it grows in value and prominence in the market. Otherwise, the company could be left in much debt from the borrowing.

Deeper dive...

Typically, private equity firms invest into more developed companies. Within this, the funds can be invested in a specific and targeted manner. For example, the fund could be towards rebuilding struggling companies, expanding those that have just exited the start-up phase or it could be directed towards a certain industry, such as healthcare.

Quick-fire Characteristics

Private Ownership

The companies that are invested in are privately held

Active

Ownership

Private equity firms often take an active role in the management and improvement of the companies

Bigger

Picture

The investment tends to last a few years in order to improve the company and to ensure a flip-side profit

Illiquidity

The investment tends to be less liquid, so investors need to commit their capital until profits start coming in

High Risk-Reward Ratio

The investments carry both a high potential return and a high risk, so the private equity firms have to ensure that they make a return on the investment

Diverse

Portfolio

Private equity firms tend to invest in various industries to diversify their portfolios and spread risk.

Types of Deals

Leveraged Buyout (LBO)

This is where a private equity firm acquires a company using a significant amount of debt to meet the cost of the acquisition

Venture Capital

Venture capitalists provide capital in exchange for equity stakes in high potential start-ups

Growth Capital

These deals involve mature companies that are looking to expand, invest or look to new markets

Distressed Debt

The firms invest in the debt of companies that are struggling financially

Mezzanine Financing

This involves providing both the debt and equity components of capital

Secondary Buyout

A private equity firm buys a portfolio company from another private equity firm

Carve-out

Where a parent company separates one of its divisions and sells it to a private equity firm

What happens next?

After the deal has been made, the private equity firm typically takes managerial control of the company. They either remove the existing team and manage the company themselves or bring in a new team, or work with the existing team. The firm will already have a plan of what they aim to do whether it be restructuring the company or expanding it into new markets. All of this with the aim of selling the company for a profit later on.

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