Private equity is a general term used to describe all kinds of funds that pool money from a bunch of investors in order to amass millions or even billions of dollars that are then used to acquire stakes in companies. Sometimes this type of investment is done to gain major or complete control of the company in anticipation of higher returns. Apart from making investments in private companies at times, PE investors buy out public companies resulting in their delisting.
Role of private equity investors
1. Raise Capital: Private equity investors helps the firm in raising capital and to bridge the gap of the financial needs. They raise capital by acquiring capital commitments from limited partners/external financial institutions such as retirement and pension funds, insurance companies, wealthy individuals, and endowments. Sometimes they also put their own money. LPs are usually required to commit a significant amount of capital in order to be allowed to participate in the fund, since the last thing the partners want is to be fielding “support” calls and communications to a “long tail” of many little investors who only commit a small amount but require a lot of hand-holding to service.
2. Shareholder Profits: The primary function of private equity, as with any other business, is to create a profit for its investors. Private equity firms accomplish this by purchasing smaller companies, increasing their values and selling them at a profit. The process can take several years and comes with high risks. If a company does not see an increase in value that covers the costs of improvements, or if the company has a setback, the investors may not make a profit.
3. Access to new markets: Private investors help the company in accessing new market and also the fund invested by them helps in company to expand its operations. It helps companies to connect with wide market and distribution. There are many companies which grew at a good level after getting funds from private investor.
4. Industry Expertise: Private equity firm also performs the due diligence of the company which involves the analysis of management, financial analysis, cost analysis and operations of the company. A firm can do better when an expertise is involved. PE investor shares the knowledge and experience they are having which further helps in the betterment of the company. Also, they help in identifying potential leads for the companies and there is high chance of deal conversions when a PE is involved
5. Improvement in operations: PE investors usually having some of the ownership in the company and they keep a check on the ongoing activities. They make sure that operations are carrying out in a rationale manner and if cost cutting is required. They make sure constant improvements in operations.
It can be stated that private equity investors get their ownership in the company but that ultimately helps in the growth and success of the company.