What is Private Equity?

Private equity is the common term for equity investments into non-listed companies in order to help such companies develop and grow under stable conditions. Private equity investments entail not only access to capital but also to other resources like financial and industrial competence, networks and advisors.

Private equity funds span a company’s entire development cycle, from the first development phase where an idea, innovation or invention is nurtured into a company through the expansion phase and into a mature company. Private equity comprises a range of different forms of financing and participants which constitute a value chain where the links suit different investors and different phases in the development of a company.

Private equity is an asset class that is classified as alternative investments and has over the past few decades typically yielded better returns than investments in the public markets. There are however significant differences between different types of private equity, different geographical markets and different private equity funds. The returns also vary over different time periods and vintages.

Private equity companies raise funds from various types of investors such as pension funds, fund-of-funds, life insurance companies, foundations and endowments or banks. These funds are then invested in potentially high growth companies. Once a private equity firm has acquired a portfolio company, it applies its management expertise to drive the company’s corporate strategy forward, accelerating growth, either organically or through strategic acquisitions or restructuring, and improving efficiency and profitability.

When the private equity fund together with the management team has carried out the strategies and plans identified at the time of the investment, the private equity firm will look to exit from the investment via a number of alternative routes such as through a trade sale when the portfolio company is sold to an industrial buyer, a secondary sale in which the company is sold to another private equity fund which can continue to develop the company or through an IPO, in which the private equity firm often stays on as a substantial owner for a period of time.

Significance to the economy

According to data from the European Venture Capital and Private Equity Association (EVCA), investments by European private equity and venture capital firms amounted to €73.8bn in 2007, and approximately 5,200 European companies received private equity investments. About 85% of these companies have fewer than 500 employees.