What is Private Equity?
Private equity simply means a stake in ownership of a company that isn’t publicly listed or traded (hence the “private” part).
The “equity” refers to the shares that represent a piece of the company’s ownership.
What are Private Equity Firms?
Private equity firms are organizations that purchase stakes in companies — or entire firms — with the goal of achieving a positive return on investment. They generate that return by eventually selling the company at a profit.
What do Private Equity Firms do?
In between buying and selling is where the magic happens. To increase the value of a company, a private equity firm will invest in upgrades to the company’s operations, products, geographic reach and/or customer base.
Because private equity firms often take a controlling interest in the companies they buy, they can make big decisions about those companies. The private equity firms will sometimes make mergers and acquisitions for the companies they own, or retool their operations to streamline them and improve their cash flow.
For example, before this founder’s company sold its portfolio company, it transitioned it away from its parent company, closed non-profitable branches, improved purchasing and sales efficiency, and developed entirely new logistic platforms to increase the company’s value.
Some private equity companies purchase controlling interests in public companies, and then take them private. This happened to Burger King, which went public in 2006 before it was taken private by 3G Capital in 2010.
In 2014, it went public again after a merger with Canadian coffee chain Tim Hortons. The gambit worked, resulting in increases in shareholder value and how much business the brand was doing.
Examples of Private Equity Firms
Some firms focus on specific industries. For example, OpenGate focuses on firms in the industrials, technology, consumer, and business services sectors with room to grow.
Other, much bigger firms have a wide variety of holdings. Bain Capital, one of the world’s largest, has invested in hundreds of firms throughout its 38-year history.
Just like your personal investment portfolio, the companies owned by a private equity firm are referred to as its “portfolio,” and the companies themselves are called “portfolio companies.”
What’s the Difference Between Private Equity and Venture Capital?
Technically, venture capital is a sub-category of private equity. The only difference is that venture capital firms focus more on startups and riskier ventures, while private equity companies prefer to invest in steadier firms.
That’s why it’s more of an (ad)venture!
And while private equity firms usually take a majority share of the companies they buy, venture capital outfits are often content with a smaller stake.
That’s because firms bought by private equity companies usually have room to grow through increased efficiencies, mergers and acquisitions — while a small startup’s new technology doesn’t need to expand across the globe yet. It just needs some cash to help it hire people and give those people the time to create something amazing.