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CandleFocus Glossary Editor
What Is Private Equity?
Private equity is a type of emergency capital for companies with no public shareholders. Private equity money is usually supplied by wealthy individual investors, pension funds, bank loan funds, and investment banks. Private equity investments usually involve the acquisition of existing companies and the restructuring of the company to maximize its value before selling it to an investor or trade buyer at an agreed-upon valuation.
Private equity firms often focus on industries or companies they know or understand well and seek to identify opportunities to gain control of or become major investors in companies that they feel offer potential for long-term success. Private equity investments often involve leveraged buyouts (LBOs), which are large-scale acquisitions of companies funded in large part by debt. In a leveraged buyout, the private equity firm typically acquires a controlling stake in the company and increases the amount of debt that the company has on its balance sheet.
The objective of private equity firms is to generate a return on the investment through strategic management and value enhancement. This can be done by cutting costs, pursuing new revenue streams, increasing efficiencies, boosting the company's market position, or revamping the company’s management and/or corporate governance.
The private equity industry has grown rapidly and is becoming increasingly attractive for investors. It tends to be most popular when stock prices are high and interest rates low. But, the success of a private equity firm’s investments depends on the strategies and skills it uses when it enters into a particular venture. An acquisition by private equity can be a way for a company to become more competitive, or to become saddled with unsustainable debt, depending on how successfully the private equity firm administers and executes its strategies.
Private equity investments often lead to significant changes in a company's structure and operations. Examples of changes that can result include the renegotiation and restructuring of debt arrangements, the streamlining of operations, cost-cutting measures, replicating and scaling up business models, and the professionalization of a company’s management team.
Private equity investments can provide the companies in which they invest with new resources and an additional point of view, which can occasionally help them achieve the next level of growth. On the other hand, some of these investments can also bring instability to a firm’s operations, shifting focus away from developing core strengths and leading to a reduction in the time available for strategic decision-making.
Private equity is a type of emergency capital for companies with no public shareholders. Private equity money is usually supplied by wealthy individual investors, pension funds, bank loan funds, and investment banks. Private equity investments usually involve the acquisition of existing companies and the restructuring of the company to maximize its value before selling it to an investor or trade buyer at an agreed-upon valuation.
Private equity firms often focus on industries or companies they know or understand well and seek to identify opportunities to gain control of or become major investors in companies that they feel offer potential for long-term success. Private equity investments often involve leveraged buyouts (LBOs), which are large-scale acquisitions of companies funded in large part by debt. In a leveraged buyout, the private equity firm typically acquires a controlling stake in the company and increases the amount of debt that the company has on its balance sheet.
The objective of private equity firms is to generate a return on the investment through strategic management and value enhancement. This can be done by cutting costs, pursuing new revenue streams, increasing efficiencies, boosting the company's market position, or revamping the company’s management and/or corporate governance.
The private equity industry has grown rapidly and is becoming increasingly attractive for investors. It tends to be most popular when stock prices are high and interest rates low. But, the success of a private equity firm’s investments depends on the strategies and skills it uses when it enters into a particular venture. An acquisition by private equity can be a way for a company to become more competitive, or to become saddled with unsustainable debt, depending on how successfully the private equity firm administers and executes its strategies.
Private equity investments often lead to significant changes in a company's structure and operations. Examples of changes that can result include the renegotiation and restructuring of debt arrangements, the streamlining of operations, cost-cutting measures, replicating and scaling up business models, and the professionalization of a company’s management team.
Private equity investments can provide the companies in which they invest with new resources and an additional point of view, which can occasionally help them achieve the next level of growth. On the other hand, some of these investments can also bring instability to a firm’s operations, shifting focus away from developing core strengths and leading to a reduction in the time available for strategic decision-making.