Private Equity

Private equity firms are investment firms that raise funds from institutional investors and co-mingle outside money with partners’ own capital to acquire public or private companies they perceive are undervalued, with a view to improving the companies’ operations such that profitability is improved. Private equity firms run the companies they own purely from the perspective of driving profit maximisation. They will invariably install new management and set about aggressively taking costs out of the business, including employees. Acquisitions by private equity companies are invariably financed not just with fund equity but with large amounts of debt, which raises the target companies’ debt leverage. These are referred to as leveraged buyouts. Hold periods for private equity owners can be short. The objective of private equity is to sell portfolio companies for profit. Private equity companies have aggressive internal rate of return targets. Exits are achieved by portfolio companies going public in initial primary offerings (IPOs), through sales of portfolio companies to other private equity companies (secondary buyouts) or sales to other companies. Private equity companies charge their outside investors (known as Limited Partners) annual management and performance fees