How Private Equity Works
Private equity firms raise financing from institutions and individuals and then invest those funds into the buying and selling of businesses. Once a pre-specified amount is raised, the fund closes to new investors and is liquidated. All of the fund’s businesses are sold within a set timeframe that is typically less than ten years. The more successfully a PE firm’s funds perform, the better its ability to raise money in the future.
PE firms do accept some limitations on their use of investments under fund management contracts, such as the size of any single business investment. Once the money has been committed, investors have nearly zero control over its management, unlike a public company’s board of directors.
The leaders of the companies within a private equity portfolio are not members of the PE firm’s management. Private equity firms control its portfolio companies through representation on the boards of those companies. It is common for a PE firm to ask the CEO and other business leaders in their portfolios to invest personally. This offers a way to ensure their level of commitment and motivation. In return, the operating managers can get significant rewards that are linked to profits when the company is sold.
With large buyouts, PE funds usually charge investors a fee of around 1.5 to 2 percent of assets under management, plus 20 percent of all profits (subject to achieving a minimum rate of return). Fund mostly profit through capital gains on the sale of portfolio companies.
How Private Equity Improves Value
Raising capital can be a necessity for business owners. Fundraising helps position your company for growth and strengthens the organization.
Private Equity vs. Venture Capital
Sometimes private equity is confused with venture capital. Both refer to firms that invest in businesses and exit them by selling their investments in equity financing. But the way that the two conduct business is very different. PE is capital invested in a company that is not publicly listed or traded. Venture capital invests in startups or other young companies with potential for long-term growth. Essentially, private equity and venture capital purchase different kinds of companies, invest different amounts of funding, and claim different amounts of equity.
Finding the Right Partner
Choosing the right private equity partner for growth can be greatly beneficial but also somewhat difficult. The right investor will offer great opportunities for growth and longevity, but the wrong partner can put your company at risk. You will want an investor that has proven success and experience in your sector. You have worked hard to build your company from the ground up, so it is critical that you make the right decision about a private equity partnership and get the right guidance to do so.
Need Our Help?
If you are interested in an exit or growth strategy or an acquisition, contact our award-winning M&A experts at Benchmark International today. We can help you determine if private equity is right for your company, source the right type of PE firm for you, or suggest alternatives.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL:
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $6B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 12 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.