Have you ever wondered that the products, services or goods that you use are majorly backed up by the private equity supported companies? Well yes, that is true, today all the famous and major things that we use in our day to day lives are funded by private equities. So, what is Private Equity? Are you aware of it?
Well you have landed on the right page as we would be presenting the basics of Private Equity for Businesses through this article. This blog will help you understand PE – Private Equity in a better way.
What is private equity?
A financial investment into a company in terms of money or capital is a form of private equity. Generally the investments of private equity are done with major and mature businesses or industries where in exchange to the investments company stakes are given. That means you can become a stakeholder or a shareholder of a company by investing in private equities in that company. Private equity is a child of a complex fiscal landscape called private markets.
What is a private equity firm?
It is just like an investment firm where they increase their value by investing in various businesses and take it to a height where they can sell it off for a great profit. As the Venture Capital Firms utilize the raised capital of Limited Partners for investing in the private companies, similarly PE does the same.
The only difference is PE demands for a great ownership stake of about 50% unlike the Venture Capitals. The PEs can have multiple ownership stakes of various companies at a given time. This collection of companies is known as a Portfolio while the businesses are known as Portfolio Companies.
What is a private equity investor?
The investors that are working for these private equity firms are known as the private equity investors. They play a major role in raising the company’s capital by selecting and dealing with the right kind of companies which would make good investments.
What is a private equity fund?
Private Equity Fund is a pool of capital that is raised by the private equity investors from a selective range of partners willing to invest in a company. They raise it till their goal of fundraising is achieved. Once it is achieved they close the fund and invest the raised capital into other promising companies.
How do private equity firms make money?
The PE makes money by collecting fees from both the performance and management. They generally follow the 2 and 20 rule for the fee structure.
- Management Fees
The AUM calculated percentage, that is the Assets Under Management which is around 2%. The day to day expenses and overhead expenses are covered by these fees.
- Performance Fees
20% of the profit investment which is calculated based on the incurred profits is performance fees. They are utilized to incentivize higher returns and also used as reward money for employee success.
How does private equity work?
The private equity investors from a selective range of partners willing to invest in a company raise private equity funds.
The companies which are considered for investments are potentially distressed companies, stagnant ones or the ones which are slow but are showing a steady growth. Leveraged buyout is the best deal irrespective of the investment structure.
A controlling stake of the company is purchased in a leveraged buyout with the help of the debt amount and equity combination which has to be repaid by the company in future. The investor in the due course will strive to improve the profitability to get the least debt repayment.
The firm makes a huge profit by selling the portfolio companies to other investors. The profit earned through these deals is distributed amongst the limited partners who had initially invested in private equity funds.
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