Private Equity

Short definition: Private equity (PE) is investment in privately held companies (not listed on public stock exchanges) where a PE firm pools capital from investors to buy, improve, and later sell those companies for a profit.

Players & basic structure

Limited Partners (LPs): investors who provide most of the money (pension funds, endowments, wealthy individuals, family offices).
General Partner (GP) / PE firm: manages the fund, finds deals, operates the business and exits the investment.
Portfolio company: the business the fund acquires.

Fundraising

Limited Partners (LPs): investors who provide most of the money (pension funds, endowments, wealthy individuals, family offices).
General Partner (GP) / PE firm: manages the fund, finds deals, operates the business and exits the investment.
Portfolio company: the business the fund acquires.

Sourcing deals

- - PE teams use networks, bankers, brokers, and proprietary outreach to source acquisition targets.
  - They screen many opportunities and shortlist the most promising.

Initial screening & valuation

- - - Quick checks: market size, profitability, management quality, competitive position.
    - Initial valuation range is estimated (multiples of EBITDA, discounted cash flows, etc.).

Due diligence (deep dive)

- - - Financial, legal, commercial, tax, operational due diligence.
    - Validate historical earnings, forecast cash flows, identify liabilities, and estimate synergies or turnaround work needed.
    - Often involve external consultants and lawyers.

Deal structuring & financing

PE deals often use a mix of equity (from the fund) and debt (bank loans / bonds) — this is leveraged buyout (LBO) financing.
Structure includes purchase price, debt terms, any seller financing, management roll-over equity, and covenants.
GP negotiates representations, warranties, indemnities and closing conditions.

Closing the deal (acquisition)

- Legal documents signed, money transferred, control changes hands.
- The new ownership may install a new board, bring in new management, or keep the existing team.

Value creation (the “active” part)

- PE firms actively work to increase the company’s value over the holding period (typically 3–7 years). Methods include:
  - Operational improvements (cost cuts, process optimization, pricing).
  - Strategic initiatives (new product launches, market expansion, M&A add-ons).
  - Financial engineering (optimizing capital structure, replacing expensive capital).
  - Replacing/upgrading management and governance.
  The aim is to grow earnings (EBITDA) and improve margins so the company can be sold at a higher multiple and higher absolute profit.

- Monitoring & reporting
  - Regular board meetings, KPIs tracking, quarterly reporting to LPs.
  - The GP manages risk, debt covenants, and execution of value-creation plans.
  10) Exit (harvest)
  Common exit routes:
  - Sale to a strategic buyer (a company in the same industry).
  - Sale to another PE firm (secondary buyout).
  - Initial Public Offering (IPO) — listing the company on a stock exchange.
  - Recapitalization — take some cash off the table while retaining a stake.
  Goal: generate returns above the original investment after paying off debt and transaction costs.
  11) Returns & fees
  - Typical GP economics: management fee (often ~1.5–2% of committed capital per year) + carried interest (a share of profits, commonly ~20% above a hurdle rate).
  - LPs receive distributions (capital + profits) after GP’s carry and fees.
  - Performance is commonly measured by IRR (internal rate of return) and MOIC (multiple on invested capital).
  Types of private equity strategies (brief)
  - Buyouts / LBOs: control acquisition of established companies using leverage.
  - Growth equity: minority or majority investments in growing companies that need capital to scale (less or no leverage).
  - Venture / early-stage: high-risk investments in startups (some funds separate VC from PE).
  - Distressed / turnaround: buy troubled companies, restructure, and revive them.
  - Sector- or geography-focused funds.