What are private equity firms?
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Private equity firms are investment funds that focus almost exclusively on ownership of the equity of privately-owned companies, rather than publicly-owned companies, like those you’d see listed on public exchanges like the NYSE, NASDAQ. Venture capital is a form of private equity, but for this, I’ll focus on the kind of fund most people are referring to when they say “private equity.*
The general characteristics of PE:
– investments **only in private companies**;
– ownership of a **significantly larger proportion of a company’s total equity** (most often a controlling interest, or greater than 50% of the company’s equity);
– investments are **most often funded with a mix of cash and debt** (often, more debt than cash);
– the PE firm makes the investment based on its **plans for how to steer the company toward greater growth or profitability in the future** (the *”investment thesis”); thus
– **takes an active role** in the management of the company (not necessarily in managing day-to-day, but in proposing, vetting, approving, and implementation major strategic initiatives, expansion, acquisitions, hiring, new product introductions and/or sunsetting old products, entrance to new markets, changing production and suppliers, etc.); and
– generally plans to **hold these investments for moderately long periods** (5-7 years).
There are exceptions to every one of these points, as PE is widely varied, but each of these things are generally *not* done by investors in public companies.
As for *why* private vs. public equity, the simple answer is that it’s about increasing control over your investments, while having the potential to generate higher returns (think 30-40% rates of return) than are seen in the public markets as a whole (low-mid teens). This comes with additional risk, but the PE firm and its investors are willing to take those risks for the possibility of outsized returns.
I can explain certain elements in greater detail, if you’d like, including explaining why public and private equity markets exhibit such different characteristics, and why there two markets in the first place.
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