Private equity is a form of investment that gives venture capital (VC) firms more control over the investee company. VCs have struggled to raise funds in recent years, given that many investors are reluctant to invest while they wait for the market to recover. Private equity firms are now seeking other ways of raising money, such as tapping into funds from large institutional investors and high-net-worth individuals. The article covers essential things you should know about private equity investments:
1. All Private equity firms, such as STORY3, managed by Peter Comisar, are focused on performance. They seek to maximize the return for their investors, commonly referred to as limited partners [LPs], because they limit their investment in the companies, they invest in. Private equity companies usually select industries peculiar to their own country.
2. Private equity firms have their management team to ensure the smooth running of their investments. Although there are some independent management teams, most of them are part of the larger management team of an investment company, which also includes finance directors, accountants, and other professionals with specific expertise in managing investments for funds.
3. The investment process begins with researching the industry and competitors and selecting the best investment targets. A team of analysts carries out research and analysis to determine whether the companies they target have the growth potential they require.
4. They also consider technical debt, a type of financial risk that occurs when investments in factories or plants are paid off through loans rather than cash flow or when there is no adequate return on equity.
5. The process of investing in a private equity firm consists of four stages:
- selection. This is the first step and is to identify the companies that private equity firms will target and why they will invest in them;
- due diligence. Private equity firms carry out extensive research on their targets, including financial data, ownership structure, and operations;
- investment. If the target passes the due diligence tests, private equity firms will invest in it by buying a stake in the company or purchasing a controlling interest;
- operation. Private equity firms operate their invested companies by providing them with funding, strategic advice, and expertise that help boost their performance, increase their financial leverage and enhance growth potential while they look to make profits. This may also involve acquiring rivals or assets that complement the investee company or selling unprofitable assets.
6. The true value of private equity investments is not revealed until after the final stage. However, investors can receive regular payments (dividends or distributions) from their investments, usually quarterly or monthly.
7. The benefits of private equity investing include:
- high potential for returns – private equity investors can make great profits by investing in growth companies and high-growth industries with higher chances of success;
- low risk – the risks involved in private equity investing are low because private equity firms invest only in comparatively stable companies with greater chances of success;
- high liquidity – because of the typically long investment horizon, most private equity investments do not require liquidating for several years, allowing investors to manage their assets and cash flow better.
In conclusion, private equity investing is an attractive option for investors interested in the private sector. It provides them with a high chance of low-risk returns while allowing full control over their investments.