Additional Resources

  1. The Economics Of Private Equity Funds [gsm.ucdavis.edu]
  2. 168 The Economics Of The Private Equity Market [people.hofstra.edu]
  3. The Economics Of Private Equity Funds [chicagobooth.edu]
  4. The Economics Of Private Equity Funds [gsb.stanford.edu]
  5. The Economics Of The Private Equity Market [citeseerx.ist.psu.edu]
  6. Private Equity's Diversification Illusion: Economic Comovement And ... [stern.nyu.edu]

Definition

In finance, private equity is an asset class consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange.

Private Equity

A private equity is a firm that generates capital investment by high net-worth individuals and firms. This capital is then used to invest in, and acquire, equity ownership in different companies and multiple businesses with a mission to sell each business, at a profit, within a few years.

The way a private equity firm works differs from a publicly held business. In publicly held businesses, stocks are listed on a public exchange and owned by a large number of people. However, stocks of a private equity firm are not quoted or available for public exchange.

In a private equity firm, investors make direct investments in private companies and conduct buyouts, hence delisting them from public equity.

Capital for a private equity is usually raided from institutional investors and retails. It can be primarily used to fund latest technologies, make business acquisitions, and even expand the working capital of an already owned company.

Majority of firms that are private equity based consist of accredited and institutional investors. This is typically because they have the financial strength and resources to invest money for long time periods. Unlike publicly held companies, private equity firms have long investment holding periods where the investors work with sheer dedication to turnaround a distressed company for profitable sale.

Increasing Growth in the Number of Private Equity Firms

The private equity business market has been growing rapidly in size every since 1970. This market has attracted the best in the country, including top notch performers from companies listed in Fortune 500 and the elitist strategy & management consulting organizations.

Private Equity Firm- Fee Structure

The structure of fee of a private equity may vary from company to company. However, generally it may be broken down into 2 parts:

  • Management fee
  • And performance fee

Functions of a Private Equity Firm

The two main functions of a private equity firm are:

  1. Deal origination
    This involves building and maintaining relationships with potential M&A intermediaries, high net-worth individuals and investment banks. This helps ensure smooth transaction execution.
  2. Portfolio oversight
    Helps introduce new and best practices for strategic planning & financial management and even institutionalize latest accounting, IT and procurement systems for boosting the investment value.
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