do both types of organizations just take other peoples money and put it somewhere else to have that money make more money? I get investments but i do not understand the point I suppose, nor do I understand the *need* for the difference. Is there really a difference????
In: Economics
Private equity is a group of people with money (their own or others) wanting to own private companies. Like buy a company, sometimes a shitty one, polish it up, make more money. Sometimes by selling it off.
Hedge Funds are pools of money to invest in securities.
First, equity essentially means ownership.
It is contrasted with debt, which is a borrowing and repayment agreement.
We have this concept of public equity, which are stocks trade on public markets which any person with a brokerage account can purchase and own. So stocks are equity. But so is a private person’s ownership in their own business.
So having stock just means owning a company. But some companies are public, trading on stock exchanges, and some companies are private and do not trade on any exchange.
Whenever someone buys or sells an ownership interest in a private business that is a private equity transaction.
Whenever someone buys or sells an ownership interest, in a public(ly traded) business that is a non-private equity transaction.
Hedge funds, businesses which use their cash and others to engage in public equity transactions, only trade in public markets. Private equity funds, businesses which use their cash and others to engage in private equity transactions, trade in private markets with private transactions.
Both private equity funds and hedge funds offer services to accredited investors to manage and invest their money in their respective markets generally with targeted investment strategies and focuses.
Basically, in a nutshell, private equity is a portion of taxes set aside by the government that gets converted into a percentage whenever you pay it back. It’s considered “private”, but in reality, it’s a misnomer. Hedge funds are excess funds that are given to the banks as a grant. Also, what happens at different times of the year is the amounts change from quarter to quarter if the hedge funds are tied to corporations. Even stranger, believe it or not, I made all of this up and I’m salty because my EXP Coin Count is -1, so now, I’m on a journey to negative coin hell.
Unfortunately the financial world is far more complex that you might imagine. There are many forms of private equity investments – they are a class of companies and exists for a variety of goals.
VC (venture capitalists) are a type of PE – investing in early businesses prior to public listing.
Turnaround specialists – buying distressed companies and engineering a business turnaround. Usually involving selling or closing divisions, paring down products, layoffs etc. The goal is returning the company to some kind of financial health.
Breakup specialists – buying distressed companies that have lots of underlying assets. Selling off those assets and then shutting down the rest. Generally speaking, not much of the company is left at the end.
The biggest feature is that private equity investments require total or near total control of the target company. It is more like an acquisition. This allows private equity, to make major changes to the company – sell off assets, remove the CEO and board, redirect strategy etc. Broadly speaking, this is high involvement, high risk but also potentially high gains. Although large PE firms might have multiple projects – each project is typically one company.
Hedge funds generally don’t take control over the companies they invest in. Hedge funds are pools of investor money used to invest in the public stock market – usually with some specific focus (healthcare, real estate, technology etc etc) The point here is to spread the investment around and any particular fund managed by a hedge fund might own shares in multiple companies.
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