Private equity is a source of investment, buys, improve upon and sell businesses in an effort to profit from the cash flow the business produces and from the capital gains upon exit. Private equity investors seek to obtain a substantial interest in a company in order to gain control over the firm’s management. Their goal is to boost the value of a company, sell off their investment, and walk away with substantially more money than they put in. A key component of private equity as an asset class for institutional investors is that investments are typically realized after some period of time, which will vary depending on the investment strategy.
Generally, investments are realized through an initial public offering, sale, merger or recapitalization. The starting point of any sensible investment process is not the investment but the investor. Every investor has different goals, different time-frames, different amounts of money available and especially, vastly different ability to take risks. It hardly needs to be pointed out that on every one of these points, a typical private equity player and a typical retail investor could hardly be more different. Private-equity group are typically more informed and hands-on, and have more investment at risk than boards of public companies. That makes them more likely to spot problems and intervene before the problems become crises. Private equity firms have become attractive investment vehicles for wealthy individuals and institutions. It is imperative that they develop strong relationships with transaction and services professionals in order to secure strong deal flow.
Returns on private equity investments are created through one or a combination of three factors that include: debt repayment or cash accumulation through cash flows from operations, operational improvements that increase earnings over the life of the investment and multiple expansions, selling the business for a higher multiple of earnings than was originally paid. This can mean strengthening leadership, refocusing strategy, reducing cost structures, instituting growth initiatives, or even breaking up the company to sell it in parts. When it works as intended, the result is more efficient use of capital, which in turn fuels the economy and drives innovation.
