Private equity is capital infused into a company without going through an issue of publicly traded stocks or bonds. The money comes from well funded investors – be they individual high-net worth investors or venture capital funds – who seek early entry into a promising start-up in need of seed capital or a young firm seeking capital to expand.
One of the world’s largest private equity investor is Kohlberg Kravis Roberts & Co or KKR, which will inject private equity funds into either a languishing firm with good prospects of a turnaround or a new firm for which they feel long-term value creation is possible. KKR stays deeply involved in the management of its portfolio companies to revitalize the business and provides private equity resources for a period of at least five years.
Private equity investors reap huge rewards when their portfolio companies are large enough and successful enough to go public in an initial public offering (IPO).
How does private equity work?
Many private equity firms, including KKR, are in the business of the leveraged buyout or LBO. They do so by starting an internal fund and raising capital from such as sovereign investors, large pension or endowment funds, institutional or private investors. They then beef up their funds by taking on substantial debt as well to buy a stake in a company which is significant enough for them to demand active management of the company. It is sometimes the case in an LOB that existing company management is replaced.
The company is then taken private, restructured and profits realized by taking it public again. The private equity fund hopes to realize more than enough gains to pay off the debt and have enough of a tidy profit leftover.
Private equity is a significant influence and it is estimated as much as US$760 billion are pooled in private equity funds in 2009 for potential deals.
Why do I need to know what private equity is?
Private equity is a term that is commonly used in investing articles in the news. Many large pension and college endowment funds (ie Harvard) invest in private equity.
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