What Is Private Equity?
Private equity is an asset class consisting of equity investments in companies that are not traded on a public stock exchange.
Private equity and venture funds exist to help raise money for companies by offering cash in return for an ownership stake. As a result, they become co-owners or even sole owners of the companies in which they invest.
Private equity firms generally receive a return on their investments through one of three ways: an Initial Public Offering (IPO), a sale or merger of the company they control, or a recapitalization. Unlisted securities may be sold directly to investors by the company (called a private offering) or to a private equity fund, which pools contributions from smaller investors to create a capital pool.
Private equity investments can be divided into the following categories:
- Venture capital: an investment to create a new company, or expand a smaller company that has undeveloped or developing revenues;
- Buy-out: acquisition of a significant portion or a majority control in a more mature company. The acquisition normally entails a change of ownership;
- Special situation: investments in a distressed company, or a company where value can be unlocked as a result of a one-time opportunity;
- Merchant banking: negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies.
In an ideal situation, they invest in an underperforming company, turn it around and sell their stake at a profit some years later. However, they also occasionally engage in the unpopular practice of asset stripping, or breaking a company up and selling its assets individually to make a profit.
The money invested by private equity funds is frequently used for management buy-outs (MBOs) where a company, or a division of a company, is bought by its managers. Alternatively, it may be used for a management buy-in (MBI), where managers from outside take over a company.
The investors in a private equity fund can usually afford to have their capital locked in for long periods of time and are able to risk losing significant amounts of money. This is balanced by the potential for huge returns.
The majority of investment into private equity funds comes from three sources:
- Institutional investors through pension funds, corporate pension plans, insurance companies, endowments, family offices and foundations.
- Fund of funds. These are private equity funds that invest in other private equity funds in order to provide investors with a lower risk product through exposure to a large number of vehicles often of different type and regional focus.
- Individuals with substantial net worth (Sophisticated Investors).
The amount of time that a private equity firm spends raising capital varies depending on the level of interest amongst investors for the fund, which is defined by current market conditions and also the track record of previous funds raised by the firm in question. Firms can spend as little as one or two months raising capital where they are able to reach the target that they set for their funds relatively easily, often through gaining commitments from existing investors in their previous funds, or where strong past performance leads to strong levels of investor interest. It is not unheard of for funds to spend as long as two years on the road seeking capital, although the majority of fund managers will complete fundraising within nine months to fifteen months.
The credit crunch has created uncertainty for the private equity industry, with many banks unable to sell on the loans they made to clients to help finance deals.
If I work in private equity what will I be doing?
Private equity houses will hire research analysts who number crunch and scrutinise the accounts of companies in which a fund is thinking of investing.
The principals appraise whether a deal is worth pursuing and, if it is, do anything from arranging legal documentation to negotiating the right price.
Originators are usually a fund’s partners who find new companies to invest in. They oversee the deals and make the most money if an investment is sold at a profit.
In private equity you will often be providing management of the companies the fund invests in with skills and funding. Private equity houses encourage companies to succeed and in doing so, make a profit themselves.
Often private equity fund managers will employ the services of external fundraising teams known as placement agents in order to raise capital for their vehicles. You will be dealing with placement agents who will approach potential investors on behalf of the fund manager, and will typically take a fee of around 1% of the commitments that they are able to garner.
In a nutshell, you will be heavily involved in the businesses in the fund and everything that goes along with that including analysing the companies, developing the companies and raising funds for the companies – looking to return your investment many times over.
How do I get a graduate scheme / internship / entry level job or career in Private Equity?
Obtaining a graduate scheme, internship or entry level role in private equity can be very challenging and competitive – though very achievable by getting your application, CV, interview and general approach right. You can guarantee that ninety percent of applicants for private equity roles will not know how to apply, so getting your application in the top ten percent makes things a lot more achievable.
Approaching the company in the right way will make all the difference. Combining the right approach with a strong interview (and in some cases assessment centre) writ a strong focused tailored CV will go a long way. Make sure you have gone through the free videos on this sight by entering your name and email address in the top right of this screen underneath the video. Once you have filled this in you will have instant access to everything you need to secure your career in private equity.
