What it is:
Private equity isfor made directly in private companies or in public companies that become private.
How it works/Example:
Although some private equity comes from private individuals, most private equity funding comes from private equity firms. These firms are often partnerships that obtain their
A private equity firm must raise the it needs to make in businesses. This fund-raising is typically done by circulating a prospectus to potential investors who then agree to commit to the . Once the private equity firm has enough commitments, the firm may begin collecting or “calling” those commitments when it wants to make an . If and when the private equity firm invests all of its , or if it simply wants to expand its activities, it may start another . Most have a fixed life, meaning they must make their within a certain period (usually about 10 years). Private equity firms may have several going at the same time.
Private equity firms are different than venture capital firms in that they generally invest only in private companies (or in public companies that want to go private). Whereas venture capital firms tend to concentrate their in new and young businesses, private equity firms often aren't afraid to invest in older companies. Private equity firms might also use in their financing structures, often when they are participating in leveraged buyouts.
The managers of many private equity firms receive an annual management fee (usually 2% of the invested ) and a portion of the ’s net profits (typically 20%). These fees compensate the managers for their expertise and responsibility to help their become successful.
Typically, private equity firms decide which companies to invest in by reviewing hundreds of business plans, meeting entrepreneurs and company managers, and performing extensive due diligence on candidates. They are very selective because they are seeking opportunities in which their grow and provide a successful exit within a certain time frame.
One of the most common and controversial characteristics of private equity funding is that private equity firms usually take active management roles and board in the companies they invest in. This often means that management gives some control over their businesses to the firms. However, private equity firms can also provide crucial managerial or technical expertise, particularly in areas where the management is less confident. This is especially the case when the private equity firm specializes in an industry or niche.
One of the most important parts of a private equity is the “exit” or the private equity firm’s plans for selling its in a company. Usually the exit, also known as the “harvest,” takes place anywhere from three to 10 years, often via an initial public offering or through the merger or of the company.
Why it matters:
Private equity is an important and necessary form of
However, private equity is not without risk. In fact, it is one of the riskiest available because many new companies fail or . Private equity firms anticipate this by diversifying their and hoping that their successful more than compensate for their losses. Nonetheless, private equity investors must be willing to take significant long-term risks for what can be very high returns.