Advertisement

Private equity

Private equity covers the many ways of raising finance 'off exchange'.

Updated August 2018

Private equity simply refers to an ownership stake in a company that is not publicly listed. Private-equity investors (usually backed by big institutions, although there are also listed private-equity funds that small investors can buy easily) either invest in unlisted companies, or buy listed companies typically ones that are viewed to be underperforming with the goal of taking them private.

Advertisement - Article continues below

Private-equity managers aim to be very hands-on owners, unlike the traditional shareholder in a listed company. By working with unlisted (or delisted) companies, the private-equity owner escapes the short-term focus of the equity markets. In theory, this gives them the space and time necessary to make the companies more efficient.

Having whipped the company into shape, the private-equity manager will then seek an "exit" generally by re-listing the company on public markets. This is a time-consuming process, so investors should expect to have to lock up their money for several years.

Tying up your cash in an asset whose true value is never entirely clear (much like a house, you only know what an unlisted company is really worth when you try to sell it) is, of course, risky. The reward investors expect to achieve for taking these extra risks is known as the "illiquidity premium".

The hype behind private equity implies that its highly-experienced practitioners take flabby, inefficient, poorly run firms that have lost their way, and then weed out the dead weight ("restructuring", as the euphemism has it) and set them back on a course for growth. The reality, according to hedge-fund manager Daniel Rasmussen, is that in most cases (70% of deals, according to his research) private-equity firms simply borrow lots of money, slash investment spending (which in turn, damages long-term growth prospects) to pay the interest bills, then sell for a higher price than they paid.

Advertisement
Advertisement

Recommended

Economic indicators
Glossary

Economic indicators

An economic indicator is any statistic that allows us to analyse how the economy is performing or is likely to perform in future.
31 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Barbell strategy
Glossary

Barbell strategy

A “barbell… investment strategy means weighting a portfolio towards the two extreme ends of an asset class with nothing in the middle.
8 Jul 2020

Most Popular

Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020
Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Too embarrassed to ask: what is “real return”?
Too embarrassed to ask

Too embarrassed to ask: what is “real return”?

MoneyWeek's latest "too embarrassed to ask” video explains what a real return is and why it's so important for investors.
5 Aug 2020