A private equity firm is an
investment management
Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be instit ...
company that provides
financial backing
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Typ ...
and makes investments in the
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
of
startup or operating companies through a variety of loosely affiliated
investment strategies In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics an ...
including
leveraged buyout,
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which h ...
, and
growth capital
Growth capital (also called expansion capital and growth equity) is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new mar ...
. Often described as a
financial sponsor, each firm will raise
funds
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...
that will be invested in accordance with one or more specific investment strategies.
Typically, a private equity firm will raise pools of
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used fo ...
, or
private-equity funds that supply the
equity
Equity may refer to:
Finance, accounting and ownership
*Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the diff ...
contributions for these transactions. Private equity firms will receive a periodic
management fee as well as a share in the profits earned (
carried interest
Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager specifically in alternative investments (private equity and hedge funds). It is a performance fee, rewarding the manager for enhanc ...
) from each
private-equity fund managed.
Private equity firms, with their investors, will acquire a controlling or substantial minority position in a company and then look to maximize the value of that investment. Private-equity firms generally receive a return on their investments through one of the following avenues:
* an ''
initial public offering
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investme ...
'' (IPO) — shares of the company are offered to the public, typically providing a partial immediate realization to the financial sponsor as well as a public market into which it can later sell additional shares;
* a ''
merger
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...
'' or ''
acquisition'' — the company is sold for either cash or shares in another company;
* a ''
recapitalization'' — cash is distributed to the shareholders (in this case the financial sponsor) and its private-equity funds either from cash flow generated by the company or through raising
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
or other securities to fund the distribution.
Private equity firms characteristically make longer-hold investments in target industry sectors or specific investment areas where they have expertise. Private equity firms and investment funds should not be confused with
hedge fund firms which typically make shorter-term investments in securities and other more liquid assets within an industry sector but with less direct influence or control over the operations of a specific company. Where private equity firms take on operational roles to manage risks and achieve growth through long term investments, hedge funds more frequently act as short-term traders of securities betting on both the up and down sides of a business or of an industry sector's financial health.
Ranking private equity firms
According to an updated 2008 ranking created by industry magazine Private Equity International
Top 50 PE funds
from Private equity international (The PEI 50), the largest private equity firms include The Carlyle Group
The Carlyle Group is a multinational private equity, alternative asset management and financial services corporation based in the United States with $376 billion of assets under management. It specializes in private equity, real assets, and ...
, Kohlberg Kravis Roberts
KKR & Co. Inc., also known as Kohlberg Kravis Roberts & Co., is an American global investment company that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate, credit, and, through its strate ...
, Goldman Sachs Principal Investment Group, The Blackstone Group
Blackstone Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate b ...
, Bain Capital
Bain Capital is an American private investment firm based in Boston. It specializes in private equity, venture capital, credit, public equity, impact investing, life sciences, and real estate. Bain Capital invests across a range of industry se ...
and TPG Capital. These firms are typically direct investors in companies rather than investors in the private equity asset class and for the most part the largest private equity investment firms focused primarily on leveraged buyouts rather than venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which h ...
.
Preqin ltd (formerly known as Private Equity Intelligence), an independent data provider, provides a ranking of the 25 largest private equity investment managers. Among the largest firms in that ranking were AlpInvest Partners, Ardian (formerly AXA Private Equity), AIG Investments, Goldman Sachs Private Equity Group, and Pantheon Ventures.
Because private equity firms are continuously in the process of raising, investing, and distributing their private equity funds, capital raised can often be the easiest to measure. Other metrics can include the total value of companies purchased by a firm or an estimate of the size of a firm's active portfolio plus capital available for new investments. As with any list that focuses on size, the list does not provide any indication as to relative investment performance of these funds or managers.
See also
* History of private equity and venture capital
* Leveraged buyout
* List of private-equity firms
*Management buyout
A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual. Management-, and/or leveraged buyout became noted phenomena o ...
* Private-equity fund
References
External links
Private equity – a guide for pension fund trustees
Pensions Investment Research Consultants (PIRC) for the Trades Union Congress.
*Krüger Andersen, Thomas.
Legal Structure of Private Equity Funds
Private Equity and Hedge Funds 2007.
*Prowse, Stephen D
The Economics of the Private Equity Market
Federal Reserve Bank of Dallas, 1998.
{{DEFAULTSORT:Private Equity Firm
Alternative investment management companies