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What is private equity?

Private equity definition

What is private equity? It is a popular alternative type of investment. It involves capital, which is not listed and traded publicly on traditional stock exchanges. Investors and funds directly invest in private companies, contribute venture capital and take part in public companies’ buyouts.

Key takeaways:

  • Private equity refers to investments made in companies that are not publicly traded, typically with the goal of achieving high returns by improving the company's operations and then selling it for a profit.

  • Private equity investors can be individuals or institutions, such as pension funds or endowments.

  • Private equity investments are generally illiquid and require a long-term investment horizon, often ranging from 5 to 10 years.

  • Private equity funds can invest in a range of industries and sectors, including technology, healthcare, and real estate.

Private companies may attract private equity investments at different stages of their development – progressing from early-stage venture capital to the stage of business growth and beyond – to improve their performance.

Institutional and retail investors may provide funds to restructure business, improve its profitability, develop a new technology, make acquisitions or convert a public company into private.

Where have you heard about private equity?

The history of private equity dates back to the middle of the 20th century. The broader private equity industry embodied two distinct sub-industries, including venture capital and leveraged buyouts. Since its origin in 1946, the private equity industry has experienced 4 major epochs, distinguished by three boom and bust periods. 

  • 1946 – 1981 – the early history of private equity with relatively small volumes of investment and rudimentary company organisations.

  • 1982 – 1992 – the first boom and bust cycle with a dramatic surge in leveraged buyout activity

  • 1992 – 2002 – the second boom and bust cycle, emerged after the savings and loan crisis, several insider trading scandals and the real estate market collapse. The period culminated with the Dot-com bubble in 1999-2000. 

  • 2003 – 2007 – the third boom and bust cycle when leveraged buyouts reached unparalleled size. 

What you need to know about private equity

Private equity meaning presupposes a range of advantages for startups and private companies. It serves as an alternative liquidity source instead of traditional financial methods, such as IPOs or bank loans with high interest rates.

A certain form of private equity – venture capital – can invest funds into companies at the very early development stages, or even ideas. Private equity helps delisted companies to implement innovative growth strategies, eliminating the pressure of quarterly earnings results, so important to traditional market scheme.

The key types of private equity investments include:

  • venture capital (investing in startups)

  • growth capital (investing in a company’s development)

  • buyout capital (investing used to buy an existing company)

  • mezzanine capital (debt financing)

  • restructuring (investing in distressed companies)

Private equity investments attract many institutional traders and wealthy individuals. However, they are not so easily accessible. The majority of private equity businesses are looking for those who can invest $25 million. Though there are companies which need only $250,000, this number is still out of the reach of ordinary investors. 

The most common ways to invest in private equity are:

  • A fund of funds usually holds shares of various private partnerships which invest in private equities. This method helps to reduce the initial required investment minimum and serves as a good hedging and diversification instrument.

  • Private equity ETFs typically track and follow an index of publicly traded companies, investing in private equities. Private equity exchange-traded funds are traded on the traditional stock exchanges and presuppose a management and a brokerage fee.

Public shares of private equity managers (companies, managing private equity funds). If you invest in shares of such companies you can still get the benefits of investing in private equity. They invest in a range of funds and help to spread the risk.

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