How to Invest in Private Equity

Private equity investors have a special place in the world of financial investing. They invest money and sometimes business skills in privately-traded companies to help them become profitable. These investors also buy failing companies and try to turn them around.

Private Equity

To understand what private equity investors do, it is important to have an idea about what it is they are investing in. Equity is the value of an asset, usually a business, minus its liabilities or debts. Private, in investing circles, means that the company, or asset, is not publicly traded on any stock exchange. Many times, these companies are startups that need funding to get started or to expand their existing business practices.

How Private Equity Investing Works

While private equity investors can be individuals, more often a group of investors pool their money together to form a private equity fund. This fund is then used to support their investment. Private equity funds are put together by private equity firms, which partially own the fund and also manage the investments. The fund may be used to support multiple different kinds of investments and to purchase controlling interest in companies. Individual investors receive profits from the investments based on the amount of their investment.

Investment Strategies

Private equity investors use a variety of investment strategies to make private equity profitable. There are three main strategies. First, they may raise venture capital, which is capital invested in high-potential startup companies, with the hope of realizing profit when stock is eventually offered to the public. Second, a private equity investor may invest growth capital in a more mature company to help it expand or transform its services. Finally, a group of investors may band together to complete a Leveraged Buyout (LBO) of a company that is underfunded or losing money.

Leveraged Buyouts

Leveraged buyouts are the most common investment strategy used by private equity investors. In an LBO, investors will combine to buy up shares of a publicly-traded company. They will then take it private. This means that they can make decisions without being accountable to shareholders or the broader public. They will then make changes in the business plan, personnel, or other parts of the company to increase the profitability of the company and have an IPO, or initial profit offering, to the public.

Advantages of Private Equity Investing

The major advantage of being a private equity investor is the investors have direct control over all aspects of the company. There is no pool of shareholders, so they do not have to worry about producing big enough quarterly earnings or having to justify decisions to anyone. This means that the company can focus on long-term productivity and a slower build-up to profitability. This can be a huge advantage for the company. It also means that the investors are likely to reap big dividends when the company finally goes public.

Private equity investors earn money by investing in private companies. Most often, these individuals are wealthy. However, in the last few years some private equity firms have begun to offer their stock to the public, so now you, too, can invest in private equity. Talk to an investment broker for more details.