While not many people really understand what Private Equity (PE) does, I would like to try, to give you an understanding of the whole topic and close a few knowledge gaps.
What is it?
Private Equity is an alternative type of investment, that deals with capital that hasn’t been publicly listed or traded on conventional stock exchanges. PE invests via funds into private companies.
Institutional and retail investors provide the funds with money, which they take to acquire participations in companies with the aim of selling them profitably at a later stage. The amount that has to be invested is determined by the fund itself. Some funds have set an investment minimum of €100.000 while there’re those that may require amounts totaling millions and also others with different investment amounts.
Types of private equity investments
There are different investment types of private equity. In the following I will introduce a few:
• Venture Capital: It mainly deals with investments targeting early-stage businesses such as startups.
• Growth Capital: Refers to a type of investment that will assist a company to continue expanding. It can also be used to assist in introducing a new product or technology.
• Buyout Capital: Type of investment that is used to purchase an already established company or one of the divisions in a company.
• Mezzanine Capital: It mainly deals with debt financing.
• Restructuring Capital: Deals with investments targeting distressed companies that have already kick-started the reorganization process.
What are the private equity techniques to enhance the overall value of purchased companies? PE may apply some techniques which can enhance the value of the company, both in the short-term and in the long-term. They include for example:
• Support of the management team of the acquired company by the experienced PE managers. • Putting in place measures that would lead to the expansion of the division or the company in previously unused territories or areas.
•Choosing to implement Buy & Build strategies. Such strategies often involve generating and using new collaborations, which can lead to a reduction in operating costs while helping to enhance overall sales. For instance:
-Coming up with a single Human Resource department that would cater to the needs of five allied companies, as opposed to having each company operating its own.
-Use of supplier relationships from other acquired companies from the PE portfolio to save costs and optimize processes.
The main goal that PE pursue is to achieve a high Return on Investment (RoI) for their investors. However, this is usually associated with substantial risks as the investments can also fail.