Private equity companies invest in private businesses on behalf of their investors.
When a company is listed on the stock market, it is described as being a public company, whereas interests in private companies are not publicly traded.
Public companies have access to a larger pool of investors, making raising capital easier. They also have to disclose financial information, which can build trust with shareholders. However, public companies are subject to more regulations and scrutiny, which can make decision-making more complex.
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Private companies have the advantage of being able to make quick decisions without shareholder approval, which can make them more responsive to market changes. They also don't have to disclose financial information to the public, giving them a competitive edge.
However, private companies may struggle to raise capital due to a limited pool of potential investors.
This is where private equity comes into play.
The role of private equity
Private equity firms raise capital from investors, such as pension funds, wealthy individuals, and institutional investors, and use that money to acquire ownership stakes in private companies.
They also sometimes buy stock-exchange-listed companies and then take them private.
Private equity investments can take many forms, such as a buyout of a company's existing owners, a recapitalization of the company's balance sheet, or a growth equity investment to fund expansion. Private equity firms typically take an active role in managing the companies they invest in, working closely with management teams to implement operational improvements and strategic initiatives.
Private equity firms can provide a flexible source of capital that can be tailored to the company's specific needs, whether that involves funding growth initiatives, restructuring the balance sheet, or making strategic acquisitions.
By working closely 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 tough decisions needed to turn a company around.
Having whipped the company into shape, the private-equity manager will then seek an “exit” – generally by re-listing the company on public markets.
Is private equity a good business?
Private equity has a mixed reputation. Private companies are typically less transparent than public companies, which can make it more difficult to assess the risks and potential returns of an investment.
Private equity firms also typically use leverage, or borrowed money, to finance their investments, which can amplify an investment's upside and downside potential.
And they’ve been accused of sucking money out of companies, putting profit at the expense of other stakeholders such as customers.
Jacob is the founder and CEO of ValueWalk. What started as a hobby 10 years ago turned into a well-known financial media empire focusing in particular on simplifying the opaque world of the hedge fund world. Before doing ValueWalk full time, Jacob worked as an equity analyst specializing in mid and small-cap stocks. Jacob also worked in business development for hedge funds. He lives with his wife and five children in New Jersey. Full Disclosure: Jacob only invests in broad-based ETFs and mutual funds to avoid any conflict of interest.
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