What Is Private Equity?
Private equity is a type of alternative investment that involves money that isn’t traded on a public
exchange. Private equity funds and investors invest directly in private enterprises or engage in
buyouts of publicly traded companies, culminating in the delisting of public stock. Private equity is
funded by institutional and individual investors, and the funds can be used to support innovative
technology, make acquisitions, grow working capital, and boost and stabilise a balance sheet.
Limited Partners (LPs) normally own 99 percent of a fund’s shares and have limited liability, whereas
General Partners (GPs) own 1 percent of the shares and have full liability. The latter is also in charge
of the investment’s execution and management. Private equity is a type of private financing that
takes place outside of public markets and involves funds and investors directly investing in firms or
buying them out. Private equity firms make money by charging management and performance fees
from investors in a fund. The ease of access to alternative forms of finance for entrepreneurs and
firm founders is one of the benefits of private equity, as is the lack of quarterly performance
pressures. The fact that private equity valuations are not determined by market forces negates these
benefits. From complex leveraged buyouts to start-up financing, private equity can take many
shapes.
Understanding Private Equity
Institutional and accredited investors, who can commit large sums of money over long periods of
time, are the primary sources of private equity investment. In order to secure a turnaround for
failing companies or to facilitate liquidity events such as an initial public offering (IPO) or a sale to a
public company, private equity investments frequently demand lengthy holding periods. Institutional
and accredited investors, who can commit large sums of money over long periods of time, are the
primary sources of private equity investment. In order to secure a turnaround for failing companies
or to facilitate liquidity events such as an initial public offering (IPO) or a sale to a public company,
private equity investments frequently demand lengthy holding periods.
Advantages of Private Equity
Companies and start-ups can benefit from private equity in a variety of ways. Companies choose it
because it provides them with liquidity as an alternative to traditional financial processes such as
high-interest bank loans or public market listing. Venture capital, for example, is a type of private
equity that invests in early-stage firms and ideas. In the case of delisted companies, private equity
financing might assist them in pursuing unconventional growth strategies away from the scrutiny of
public markets. Otherwise, the time period available to senior management to turn a firm around or
experiment with new ways to minimise losses or create money is drastically reduced by the pressure
of quarterly earnings.
Disadvantages of Private Equity
Private equity has its own set of difficulties. To begin with, liquidating private equity holdings can be
challenging since, unlike public markets, there is no ready-made order book that matches buyers and
sellers. In order to sell an investment or a business, a company must first look for a buyer. Second,
unlike publicly traded corporations, the pricing of shares in a private equity firm is set by discussions
between buyers and sellers rather than market forces. Third, instead of a broad governance
structure that mandates rights for their public market counterparts, private equity shareholders’
rights are generally negotiated on a case-by-case basis through talks.
