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What Is Private Equity?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 10 July 2014
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Private equity is a term used to describe money generated from individual investors and used to buy a portion of equity in a company. Many times, the purpose of generating private equity is to purchase a public company and turn it into a private one. Most private equity investing is done by wealthy individuals or investment banks that have excess money to invest. In some cases, a private equity fund is formed by working with multiple investors.

Private equity is money used to purchase a company that is provided by individual investors. Private equity can be used for a variety of things. One of the more popular applications of private equity is to use it to purchase a public company. This allows the investor to take control of the company and change it to his or her liking.

Many times, the goal of this process is to get the company off the stock exchange and implement new management techniques in the company. Then, after a certain amount of time, the investors can then have an initial public offering and take the company public again. Many times, the investor can bring in much more money through this process than was originally invested.

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The majority of investors who choose to get involved in this type of investment are wealthy individuals or institutional investors such as an investment bank. In order to get involved with this type of investment, an investor has to have a large sum of money to work with. Many times, the money will be tied up in the investment for several months or years before any profit is realized.

Another means of coming up with private equity is to utilize a fund arrangement. With this type of scenario, a company sets up a fund to work with. The manager of the fund will then go out and try to attract wealthy investors to get involved in the fund. The investors will each invest a certain amount of money and it will be pooled together in the fund. The fund manager then has the ability to use the money in the fund as he or she sees fit.

By using this money, a fund manager can successfully purchase a large company. Each investor in the fund will have a proportionate share of ownership in the new company. After the company has been turned around, all of the investors will receive profit from the deal.

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Discuss this Article

burcinc
Post 3

@anamur--what @fify wrote is true for regular private equity but for fund arrangements, the investors and management team are separate.

The investors or shareholders are the people who put in the money and they receive most of the profit of the company. And then there are the investment managers who manage the company but don't really invest any money. If they do invest, it's super minuscule. They still receive part of the profits but much less than what the investors receive.

A fund arrangement in private equity is great for investors who want to have a share in a company but don't want to deal with management.

fify
Post 2

@anamur-- I think it works both ways. Some investors may not be too active in how the company is managed but others will be very active. It's in the interest of investors to give guidance and advice to the company because they could increase the value of shares and profit.

Some investors are not too interested in the company though because they don't plan on staying for long. Many investors actually enter and exit a private equity very quickly, buying and then selling all of their shares.

serenesurface
Post 1

If there is a fund arrangement in a private equity, will the shareholders have a say in how the company will be managed?

Or do they just benefit from the profits leaving the fund manager to deal with management and policy issues?

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