All You Need To Know About Private Equity – Your Guide to Private Equity
There has been a rapid increase in the popularity of Private Equity investment over the last decade. Private equity investment trusts are equity investments in a successful company that has the potential to grow and cannot be traced publicly in the stock market. Private equity investment capital raising is done by private equity firms and rich individuals who own a private limited business. In this article, we will talk about the basics of private equity, what it is, its benefits and how it works.
What is private equity?
Private equity refers to an investment that consists of capital that is not made public and cannot be traced publicly. Private equity consists of private equity investment trusts, private equity fundraising, and investors that invest in private companies or investors that do buyouts from public companies, which leads to the delisting of public equity. High net worth individuals or institutions provide private equity capital raising, and then the capital Is used to help startups and fund new technology and expand working capital.
Understanding private equity
Private equity investment trusts are run by accredited investors or institutional investors who are able to invest significant sums of money for extended periods of time. The private equity capital raising helps save distressed companies and allows events such as initial public offering to take place easily. It also helps to sell a public company.
Benefits of a private equity
Private equity fundraising offers many benefits to startups and companies. Companies prefer it because it allows them to carry out liquidity events as an alternative to high-interest bank loans or being listed on the public market. Venture capital, a form of private equity, also helps startups and early-stage businesses. For companies that are delisted, private equity capital raising can help them go through unorthodox growth while being protected from the eyes of public markets.
How does private equity work?
Private equity firms engage in private equity capital raising done by institutional investors, and high net worth individuals invest in different types of companies and assets. As a result, there are different types of private equity funding, including:
1) Vulture financing
Also known as distressed funding, it helps distressed and troubled companies with businesses that aren't performing well. The main aim behind investing in troubled companies is to help them turn things around by changing their operating systems and management techniques or selling one of their assets for a profit the company can use to grow. Assets such as physical machinery, real state, or property. Companies that file for bankruptcy are great candidates for vulture financing.
2) Leveraged Buyouts
This is the most common type of private equity funding. Its main aim is to buy out a company to improve its functioning, sales, and overall business and then sell it for a profit. The leveraged buyout process involves a private equity firm that finds a potential company and a special purpose vehicle for funding the company. Private equity firms usually use debt to finance the transaction. The debt funds are transferred to the target company's balance sheet for tax records. To get the company back to business, private equity firms employ multiple techniques such as reducing employees and re-hiring the entire team.
3) Real estate private equity
Private equity funds are used in commercial real estate and real estate investment trusts. According to statistics, private equity real estate finds are expected to grow by 50% by 2023 to reach a market of nearly 1.2 trillion.
4) Fund of Funds
As the name suggests, this type of private equity funding's main aim is to invest in other funds such as mutual funds and hedge funds. Thus, they are ideal for investors who cannot afford the capital requirements of such funds.
5) Venture capital
Last but not least, venture capital is a type of private equity in which investors provide investments to startups and entrepreneurs. Startup funding has many different stages, so depending upon which stage the startup finding is in, venture capital can take many different forms.
For example, investors provide capital to entrepreneurs during the seed phase to build an idea into a product or service. Like that, during the early stage, the capital provided by investors can help grow the company and establish it in the market. Thus, venture capital financing enables entrepreneurs to grow their businesses and see their idea become a reality.
In a nutshell
This article must have helped you understand private equity a lot better. If you are new to the industry, it will surely take your time to understand all the terms, but you will get there with time.