Private equity is the common term for equity investments into non-listed companies, made 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, such as 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 ownership model which has developed into an asset class for institutional investors, classified among alternative investments, and has over past 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, via different legal structures, from various types of investors, such as pension funds, fund-of-funds, life insurance companies, foundations, endowments and banks. These funds are then invested in potentially high-growth companies. Once a private equity fund has acquired a portfolio company, the firm 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 have carried out the strategies and plans identified at the time of the investment, the private equity firm will look to divest the portfolio company via a number of alternative routes, such as a trade sale, when the 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, when the private equity fund often stays on as a substantial owner for a period of time.