Private Equity Funds
What is Private Equity Funds?
Private Equity can easily be defined as private ownership. Like investing in residential or commercial real estate, private equity investing is a way to acquire ownership or part ownership. Private equity investing however, applies to more than the real estate industry. It extends to include ownership in other financial transactions such as venture capitalist funding, special debt funding, certain real estate funding, leveraged buyouts, and public company buyouts.
Private equity or ownership is not noted on public exchanges and can consist of a single investor, a group of investors, or a firm seeking to acquire ownership or part ownership in a target investment. We typically see private equity investing where a large amount of capital is needed. For instance, private equity lending is popular among distressed property financing where real estate investors aim to fix and flip properties. Like commercial and residential real estate investing, the goal of private equity is to buy low and sell high. To sell high, the target investment, whether it be a fund or company, must increase in value. A value increase at the company level usually occurs through various improvement attempts. Like renovating a home, a private equity investment may attempt to improve business prospects, so that upon selling, there is profit to be made. Once a company, fund, or property is worth more than the original purchase, the investing party may seek to sell.
Private Equity Investing Example
Private Equity Investing at the Company Level
Growth Capital or Venture Capital Private Equity Investing
Let’s say you’re a start-up business owner. Your business is young, revenue is low, and debt financing is scarce. A private equity investor or firm that sees potential in your business may offer to invest a certain amount of capital for control and ownership in your company. In hopes that the business will grow and evolve into an industry leader, the private equity investor takes on the investment and often assists in guiding and improving business operations. In this type of private equity investment, the holding period may be on the longer side to ensure a turnaround for the target investment. The goal is always profit.
Leveraged Buyout Private Equity Investing
Take for instance a once publicly traded company that had available stock ownership. A private equity firm may acquire this public company which then delists the company from public exchanges. Typically, we see a leveraged buyout consisting of 60-75% of the target company’s debt. For these situations, public companies want to relieve the debt incurred as quickly as possible, while maintaining the current cash flow. The current state of cash flow in a leveraged buyout is very important because it helps determine future cash flow. Interest payment for the private equity firm in a leveraged buyout is dependent on future cash flow. The goal: as the debt balance lowers, the company’s value rises.
Private Equity Investing at the Real Estate Level
Private Equity Real Estate Funds
Private equity real estate funds are not publicly traded and available solely to accredited investors. This stream of investing is for individuals who are not interested in direct ownership, but want to invest in large income producing real estate. Typically, you will see multiple investors pool their funds for a long term real estate investment in a large income-producing property. This investment stream requires a large upfront capital commitment, where performance is based on the real estate market versus the stock market or public exchange. In addition, private equity real estate funds are tax free, and only upon distribution to investors are gains and losses individually taxed.
Private equity is a way to acquire ownership or part ownership in funds, companies, and real estate. Private equity investments occur off stock exchanges, and typically require a significant amount of upfront capital. In private equity investments, there are longer holding periods to ensure good turnarounds with more hands-on control. Like all other investments the goal of private equity is to re-sell for a profit after value increases.