Continuing with our theme of investment strategies today we are going to take a deeper look into what private equity is. To do this we have the brilliant Tyler Tysdal with us, a man who has dedicated his life to investment and finance, throughout his career he has been an investor himself, as well as a highly successful fund manager. He is therefore the perfect person to help us with this brief overview of what private equity is, and how it is used in the world of business.
In a Nutshell
Simply put, private equity is an investment vehicle which looks to invest funds to buy and reorganize the structure of a company that is not publicly traded. The idea of this investment is to buy shares in the company and then to increase the value of those shares and then sell the investment, spreading the profits between the private investors who put their money in the fund.
The most common form of private equity is a leveraged buyout, and here is an example of how it works. Private equity firm 123 Investment recognizes the needs of a company, 456 Limited which is struggling and needs investment. The private equity firm takes out a loan of $5bn and pumps $3bn of their own funds to purchase all the shares in 456 Limited. Once the company is bought they will restructure and replace the management team, sell off assets which aren’t required and streamline the work force. Three years following the purchase the company is sold for $11bn in a buoyant stock market and 123 Investment is able to pay the money back to the bank, replace the $3bn which it took from its own funds and share the $3bn profit to its investors.
Whilst a leveraged buyout is the most common form of private equity there are other strategies which PE companies may take on. Sometimes they will only look to take on a small percentage of the shares of a company which needs a cash injection but will generally look to place a member of its team on the board during the investment cycle. Alternatively there will be a larger share cut but the need to pay off certain debts which the company has.
Broadly speaking venture capital is a type of private equity but in traditional terms they are every different. Venture capital focuses on new businesses and startups which require both money and experience in the industry to help launch them off the ground and impact opportunities which they have. Venture capital offers a bigger risk to the investor and they often need a lot of money for the shares that the VE receives. Ownership, point of investment, risk levels and potential returns are the key differences between venture capital and private equity. If you want to invest in private equity then you can often find funds with a buy-in of as little as $100,000, find the right fund for you and utilize this strategy to d