A private equity firm is an investment company which uses funds or capital coming from disparate investors for expanding and supporting its startup operations. Neither they are listed publicly nor are their shares traded in the stock market.
This is why equity firms do not have to act in accordance with most of the regulations which public companies have to abide by. Frequently, referred to as financial sponsors, private equity firms raise funds to invest as per a few particular investment strategies. So, who exactly are these people investing in equity?
Private equity investors are generally high net worth people, institutional investors along with venture capital companies which carry an interest in sponsoring the company’s operations which could be for business as well as a personal interest. The aim of Private equity firms is to offer investors with profits, customarily within 4-7 years.
It includes investment managers or companies which obtain capital from rich investors for investing in existing and new companies. The services provided by the managers or the private equity firms are remunerated through certain fees and sometimes via a specific percentage of the gross revenues.
An equity firm commonly purchases a company through auction. After the company has been bought, the equity firm tries to enhance its value through several strategies like implementing an effective growth plan along with process improvement. It also introduces better procedures, technologies as well as other tools which boost the operational efficacy together with the productivity of the organization.
Role of Private Equity Firms
1. Raise Capital
Equity firms undertake the work of raising capital by obtaining capital from partners and external financial institutions like pension & retirement funds, wealthy individuals, insurance companies, and endowments. Sometimes, they also put a certain segment of their money for making a generous contribution to the fund. In most cases, the limited partners are required to invest a large amount of capital.
2. Sourcing, Diligence along with Deal Closing
At the time of analysis of the companies that are being considered for acquisition, private equity professionals keep in mind things like the industry in which the potential company operates, the products and services that it offers, the internal management, the financial performance as well as the plausible exit scenarios. Moreover, the firm might work on a prospective deal through their partners’ reputation, efforts in addition to the networks of Investment banking professionals or via investment banks.
3. Management by upgrading Operations as well as Cutting Costs
Even though most private equity firms do not get involved in the daily functions of the portfolio companies, private equity professionals offer support and also advice over financial management, strategy building together with operations. Further, the level to which they get involved entirely depends on how much they have invested in the company. In a case where the stakes are small, they tend to maintain a distance, however, if the stakes are high, they prefer being a part of the everyday running of the company to ensure a profitable outcome.