Private Equity: A Beginner’s Guide

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Last Updated: Nov 27, 2017

Private equity is the funds that come from several investors to raise millions or billions of dollars to buy stakes in other companies.

Basically, private equity is also considered as venture capital. However, PE is usually associated to the investments used for mature companies that already generate income, but needs boost, tough choices, or revitalization to have higher value.

On the other hand, “VC” are funds used to invest in companies that are not yet established, but has new technologies that has a big potential to generate big profit. “PE” are used for franchise, service business, and manufacturing businesses.

There are cases when a private equity firm will acquire a company outright and still let the founder run or manage the business, sometimes the firm will replace the leadership. There are also cases when private equity firms will buy out the founder, give expansion funds, cash out other investors, or provide recapitalization for failing businesses.

Private equity can also do a leveraged buyout, where the firm borrow extra money to have a stronger buying power with the assets of the company to be acquired as collateral.

Private equity funds may forge new partnerships, have new ideas, and find new managers that could possibly rejuvenate and bring the dying business back on track. These are some of the major advantages of using private equity funds.

Private equity can be sometimes ruthless, leaving out the founders, the workforce and the past successes of the business out of the picture to focus on profit, profit and profit. Its ultimate goal is to earn money for the investors. This type of funds is not best for young companies who are still trying to find its way through the market.

There is a new kind of private equity fund known as search fund. Here investors give a couple hundred bucks to an upcoming entrepreneur looking for a lucrative company to invest in. If the future entrepreneur finds on, that will be the time when the investors throw in their millions.

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