A Private Equity Firm is a firm that manages the investment of equity securities in corporations not listed on the public exchange through various strategies. Each firm employs several Private Equity Funds, which are the projects jointly led by the firms and limited partners. These limited partners are often public or corporate pension funds, foundations, insurance companies, wealthy individuals, etc. Private Equity Firms receive shares in the profits earned from each of the funds they manage as well as administration fees for the investment strategies they engage. PE is normally catered towards more matured companies rather than early stage business.
Private Equity Firms are known to buy and invest in underrated and undervalues companies with little stock power. Once bought, the companies are then removed from the public stock market so that the private equity firms can make shifts in internal procedures and management without releasing information to stockholders. Similar to house-flipping, the private equity firms implement common strategies to renew the company and then will either bring in new investors that will buy the company for a desirable profit, or take the company public again in the stock market.
Common Investment Types
- Growth Equity (also called growth capital and expansion capital): investments that focus on slightly matured companies that are looking to grow and restructure their firms, as well as enter new financial markets. These companies are typically stable and sustainable yet lack the capital to head on major projects and expansion efforts. This equity type is structured as either common or preferred stock (although some instances of hybrid structures have been noted).
- Venture Capital: investments towards young and fast growing early-stage, high risk/potential startup companies. Read more about Venture Capital here.
- Leveraged Buyout Investing (LBO): the strategy of acquiring the controlling majority of a company’s equity or shares through leveraged (borrowed) financials. Attractive buyout candidates include companies that have potential for new upper management, capital assets like buildings and property used for collateral, and depressed value of stock prices. PE Firms finance LBO with a hybrid structure using syndicated loans that deliver revolving credit and high-yield bonds.
- Recapitalization: the restructuring of debt and equity without disruption to a company’s balance sheet. Generally used by private companies, this form of refinancing issues bonds that increase money which allows for the buying of stocks or paying of dividends.
- Mezzanine investing: a type of debt financing that allows the lender claimed rights in a company if their loan is not paid back. Frequently used to finance acquisitions and buyouts, mezzanine financing is operated about 6-12 months before a company goes public so that profits from a public offering will repay the debt. This equity type is structured as either debt or preferred stock.