Many people don’t have knowledge about this, but many of the goods, services, and products that one uses in their day-to-day life are from private equity-backed firms.
Private equity(PE) is an alternate mode of private financing that is composed of funds and investors which directly invest in private organizations.
In this article, let’s understand few elements of PE, such as:
- What is PE?
- How PEworks?
- What investment strategies PE firms use?
- What are the advantages of PE?
- Top PE firms
What is private equity?
PE is a form of financing where money, or capital, is invested into an organization. Basically, PE investments are done into mature businesses in traditional industries in exchange for equity, or ownership stake. Private equity is a bigger subset of a more complex piece of the financial landscape called as the private markets.
Private equity is an alternative asset class alongside real estate, venture capital, distressed securities, and others. Alternative asset classes are considered a less traditional equity investment that means they are not as easily accessed as stocks and bonds in the public markets.
How private equityindustryworks?
Private equity raises funds from investors and wealthy individuals to invest in several assets. A PE firm invests in businesses with an objective to improve the value overtime before eventually selling the organization at a profit. The PE firms take a majority stake 50 percent sometimes even more ownership, in the organizations, they invest in. The PE firms will have majority ownership of several organizations at once.
The structure of investments varies from one private equity industry to other, but many usually follow Leveraged Buyout (LBO). In LBO, an investor purchases a controlling stake in an organization, with the help of equity and a significant amount of debt that should be repaid by the organization. In the interim, the investor works to enhance profitability. So, that the debt repayment is less of a financial burden for the organization.
What investment strategies PE firms use?
Every private equity industry has its investment strategy based on its research for the industry and the economy. They also have their own type of investment styles too. Few prefer buying the other organizations that are undervalued, whereas few like to target those that are inefficiently running.
They mainly use LBO to get the returns and to limit the amount of money that they need to invest while buying a company. The PE firms take a loan from banks to buy a company, and then use the organization’s profits to pay the debt over time. This strategy gives the firms to generate better returns as well as to limit the amount of money they have at risk.
What are the advantages of private equity?
- The private equity is favored by firmsbecause it allows them to access to liquidityas an alternative to conventional financial mechanisms, such as high interest bank loans.
- If an organization is delisted, PE financing will be helpful for such firms to attempt unusual growth strategies away from the eyes of markets. As these organizations don’t have the pressure of publishing their quarterly earnings.
Top PE firms
Here is a list of top private equity firms where an individual can start their career in the private equity sector.
- Warburg Pincus LLC
- KKR & Co. Inc.
- The Blackstone Group Inc.
- Neuberger Berman Group LLC
- The Carlyle Group Inc.
- Apollo Global Management Inc.
- Bain Capital LP
- Vista Equity Partners M
- CVC Capital Partners
- EQT AB
Conclusion
Knowledge of PE will be very helpful for individuals who want to make a career in this field. The PE firms are seeking professionals who with their skills and expertise can crack better deals and make the business flourish.