Private equity is an asset class which is not publically traded on a stock exchange (“Private Equity” par. 1). Private equity investments are generally aimed at increasing a company’s value and productivity in order to receive profits through interest or reselling of an acquired firm.
The primary players in the private equity investments market are private equity funds, venture funds, and angel investors. Private equity funds focus on underperforming companies. They usually hire management specialists to increase the market value of the companies they acquire to sell them in the future. Venture funds focus on new and unexplored areas of businesses, investing in new ideas which, they think, can bring profits in the future. Angel investors take their name from Broadway performers naming the wealthy benefactors of the show’s about to close “angels”. In a more general sense, angel investors help severely underperforming companies on the edge of bankruptcy. Angel investors take high risks and rarely make any money off their projects (Rachleff par. 15).
The investment strategies in the private equity area are aimed at increasing the business’s working capital in order to support expansion and growth. The leveraged buyout strategy is one of the most common in the industry. In such cases an investor uses a sum of money, acquired mostly through loans, to buy an underperforming company. After the buy-out, the investor uses his expertise to streamline and expand the company, increasing its market value. A couple of years after the acquisition, the company is sold off, the initial loans are returned, and the profits separated among the partners (“Leveraged Buyout – LBO” par. 1). Another commonplace strategy is providing a growth capital to a successful company. This strategy usually targets businesses which do not generate enough profit to fund their own growth. In return, the investor gets a share in the ownership of the company and interest payments (Stewart par. 1). Venture funding is also an effective approach to private equity investments. The venture strategies focus on new and unexplored businesses which can be potentially profitable. New technologies and business strategies are the focus of such investments (PrivCo par. 20).
The biggest challenge of private equity investments is the risk associated with such activities. The company performing a leveraged buyout risks finding itself in huge debt if their estimations turn out to be incorrect. Venture funding is inherently unpredictable since there are no previous examples to assess the potential of the idea. Angel investors generally act out of personal interest and rarely achieve any real profitability. Private equity is a risky area and companies operating in this market require expertise and foresight to avoid losing huge sums of money. Nonetheless, it has been a stable area of investment over the last few years while the public equity markets experience instability heightened by the global economic crisis (Bain & Company par. 2).
Private equity investments industry is not clearly defined. It is mainly described as being opposed to the public equity investments through stock exchange markets. Private equity investments are more directs and aimed at increasing the productivity and scope of the target company rather than acquiring a trading asset in the form of stock. This industry helps new ventures develop, accelerates the growth of existing businesses and allows distressed firms to survive. While investors pursue their own goals, their money promotes market development and allows more diversity.
Bain & Company 2016, “Bain & Company’s Global Private Equity Report 2016”. Bain & Company Website. Web.
Investopedia. n.d., “Private Equity”. Investopedia Website. Web.
Investopedia. n.d., “Leveraged Buyout – LBO”. Investopedia Website. Web.
PrivCo. n.d., “The History of Private Equity and Venture Capital”. PrivCo Private Company Financial Intelligence. Web.
Rachleff, Andy 2012, “Why Angel Investors Don’t Make Money … And Advice For People Who Are Going To Become Angels Anyway”. The Crunch. Web.
Stewart, Matthew 2012, “Growth Equity: The Intersection of Venture Capital and Control Buyouts”. Fenwick & West. Web.