Private Equity 101
What Is Private Equity? The Definitive Guide
6 min read
Key takeaways
01
Soft skills such as organisation, multi-tasking and calm professionalism count as much as sector experience.
02
A PE fund is typically a limited partnership with a fixed term of 5 to 10 years, managed by the General Partner on behalf of Limited Partners.
03
Common strategies include buyouts, growth (minority) investing, carve-outs, distressed investing, debt funds and secondaries.
04
PE firms concentrate on strategic value creation rather than the day-to-day running of the businesses they own.
Private Equity (PE) is an industry made up of investment funds, managed by Private Equity specialists (management companies). The management company oversees a fundraising process, targeting a variety of investors, then manages the deployment of that capital into illiquid assets.
The buy-side investment industry can be separated into public and private investment firms, with asset managers and hedge funds on the public (liquid) side and private equity firms on the private (illiquid) side, investing into unlisted securities.
Occasionally, Private Equity firms will look to acquire a publicly listed business. This is known as a ‘take private’ transaction and involves the business being delisted from the relevant exchange.
What is a Private Equity Firm?
A Private Equity Firm is a company that identifies and executes investments, acquiring either a minority or majority stake in an unlisted business, with the intention of achieving a profitable exit in the future.
Once they identify a target and perform detailed due diligence, the transaction goes to the investment committee, consisting of senior figures within the company. If approved, they will attempt to execute on the investment.
They look for companies with untapped potential and identify ways to increase their value through a combination of corporate restructuring, cost-saving and growth or innovation. PE firms do not typically get involved with the day-to-day running of the company; they leave this to the company’s staff while they concentrate on the bigger strategic picture of improving operations and increasing profitability.
What is a Private Equity Fund?
A Private Equity Fund is a collective investment scheme managed by a PE firm, also known as the General Partner (GP), on behalf of investors (Limited Partners) in exchange for fees and a share of profits. It is a pool of capital, invested on a discretionary basis by the PE firm. Having a sizeable amount of committed capital allows them to pursue long-term strategies with the goal of achieving superior returns.
A PE Fund is typically a Limited Partnership with a fixed term of 5 to 10 years, carrying substantial entry requirements for investors.
The different strategies of Private Equity
As the PE industry has matured, many firms have begun to specialise in certain business areas or strategies. Sector specialisms have become more common, with some firms focusing solely on tech or energy, for example. Geography is also a significant factor.
- Buyouts: Acquiring a majority stake in a company.
- Secondary buyouts: When one Private Equity firm sells a company to another.
- Carve-outs: Buying subsidiaries or units of other companies.
- Distressed investing: Taking on struggling businesses where turnaround opportunities exist.
- Growth (minority investing): Finding companies with solid balance sheets where capital injection can help move the target company forwards.
- Debt funds: Providing financing for deals, liquidity solutions or managing non-performing debt.
- Secondaries: Buying out the fund positions of investors who need to liquidate their stake.
How is a Private Equity Firm structured?
PE Firms come in a wide range of sizes, specialities and cultures. However, a typical PE Firm structure will follow a clear hierarchy, from Analyst up to Managing Director or Partner.
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