Private equity (PE) is one of the most popular and least understood types of investments. It refers to investments in companies that are not traded publicly on a stock exchange. Private equity investing can be a lucrative way to make money, but it is also risky. In this article, we will discuss what private equity is, how it works, and why you might want to consider investing in private equity.
What Is Privet Equity (PE)?
Table of Contents
Private equity involves the combination of money from private individuals and businesses, as well as sometimes governments or other institutions, with that of a private equity firm. Private equity firms raise such capital for the purpose of investing in private companies that are not available to the public. The goal of this is to make gains on these investments through various means, primarily via an eventual sale of the company or a public offering of shares, either of which should bring in significantly more than what was initially put into the company.
There are many different types of private equity investments, including leveraged buyouts (LBOs), venture capital investments, mezzanine finance and distressed investments. We’ll take a brief look at each of these below:
Leveraged Buyouts (LBOs)
This refers to the purchase of one company by another. The buyer, who will usually be a private equity firm, will use debt in order to finance this takeover. For example, if an LBO deal is worth $100 million, the firm might put up $20 million of its own money and borrow the remaining $80 million from a lending institution. Once the takeover is complete, the goal is to pay off that debt (and make a profit in the process) by either selling the company or taking it public.
Venture Capital Investments
This type of private equity investment is for companies that are in their early stages of development, such as startups. These investments are generally riskier than LBOs because the company may not be generating revenue yet or have a proven track record. However, venture capital firms believe that with enough funding and guidance these young companies could eventually become profitable businesses and provide large returns on investment (ROIs).
This refers to a type of private equity that is used to finance companies, usually during their growth phase. These investments are generally less risky than venture capital because they’re made in already profitable businesses and are more debt-like (i.e., the investors will be paid back with interest). One downside, however, is that mezzanine finance typically charges a higher interest rate than debt or traditional equity investments.
This type of investment is when private equity firms purchase companies or assets that are in financial trouble. The goal is to turn around the company and make a profit off of it, usually by selling it or taking it public.
Why Invest In Privet Equity?
I’m sure you must have heard this phrase before, “The best time to plant a tree was 20 years ago. The second-best time is now.”
Well, that holds very true in the case of private equity as well. Over the last few decades private equity has evolved into a growing asset class offering significant benefits for investors. Here are 4 examples for benefits for investors:
Potential For Higher Returns
One of the main attractions of private equity is the potential for higher returns than what you would get from investing in publicly traded companies. This is because, as mentioned earlier, private equity investments are typically made in companies that are not as well known and therefore may be undervalued.
Diversification In Options
Another benefit of private equity investing is that it can help you to diversify your portfolio. By investing in a mix of public and private companies, you can reduce the overall risk of your investment holdings.
You can also take advantage of the fact that different types of companies tend to perform better during certain economic cycles. For example, private equity firms often invest in cyclical industries like construction and auto manufacturing because these sectors are less affected by changes in the global economy than some other industries.
Less Liquidity Risk For The Investors
Unlike investing in publicly traded stocks, when you invest in private equity you are not as reliant on the market to provide a liquidity event. This means that you can hold onto your investment for longer periods of time, if desired, without having to sell it at a loss.
The Privet Equity (PE) Profession - A Short Brief
The private equity (PE) profession comprises one of the most important fields in finance. It both directly and indirectly touches many areas of modern finance and society at large, whether it is through improving operational efficiency, expanding sales and distribution operations, or by investing in and growing small and medium-sized enterprises that provide jobs.
PE is the profession that directly makes money by investing in both mature and start-up companies. PE professionals invest other people’s money, either through leading funds or through co-investing alongside other investors. This article will provide an overview of this highly lucrative area of finance and give a taste of the responsibilities involved in working for this industry at different levels.
If you are interested in private equity investments you may also like other articles about investing and finance that you can find in our blog.