Private equity refers to collecting funds or private investors that pool money to buy an existing or mature private company not listed in a stock exchange. Upon purchasing a company, private equity investors will flip and improve it through a process called leveraged buyouts before selling them on a more significant amount. They usually supplement their private equity funds with a leveraged fund from bank loans and other financial means.
Private equity focuses only on equity investments, and it can be in the form of venture capital, growth capital, or distressed investments. Most private equity firms or investors are interested in those young or starting companies with higher potential for growth and promising management practices. Others are usually targeting those already established companies and those that are distressed ones.
Private equity used to buy shares, take significant control over the company, impose some renovations and reformations, and then sell it to generate profit from its proceeds. The investment horizon of PE includes acquiring all shares, delisting them, change management, improve financial performance.
There must be a long period of waiting before returns of investments are realized and enjoyed.
Key features of private equity
- Private equity uses the funds that come from wealthy investors, hedge funds, and other private endowments.
- Private equity does the restructuring of the acquired firm, which usually involves change or rotation on management and cost-cutting.
- Private equity gets some additional funding from debt financings, typically through bank loans.
- Private equity intends to invest in a private company to increase its value before selling it at a higher price for profit sharing.
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