What do Private Equity firms do?
Private Equity (PE) firms invest in companies…
…usually private (not publicly traded) with the goal of improving their value and eventually selling them at a profit. Here’s what they do in plain terms:
Raise Funds from Investors
PE firms raise large amounts of money from institutional investors (like pension funds, endowments, and wealthy individuals). These funds are pooled into a private equity fund, which the firm uses to invest in businesses.
Buy Companies (Partially or Fully)
They use this capital to buy companies, often taking a controlling interest. These are usually:
- Underperforming businesses with turnaround potential
- Stable businesses that can be optimised or scaled
- Family-owned or founder-led businesses where owners want to exit
This can include:
- Leveraged Buyouts (LBOs): Buying companies using a mix of investor capital and large amounts of borrowed money (debt)
Improve Business Performance
After acquisition, the PE firm typically:
- Installs new management or works closely with existing leadership
- Cuts costs, improves operations, or restructures the business
- Expands into new markets or launches new products
- Prepares for sale or public listing
Their goal is to increase the company’s value significantly within 3–7 years.
Sell the Business (Exit)
Once the value is increased, they aim to sell the company for a profit, usually by:
- Selling to another company (trade sale)
- Selling to another PE firm (secondary buyout)
- Taking the company public via an IPO (Initial Public Offering)
Profits from the sale are then returned to the fund’s investors, and the PE firm takes a share (called carried interest, typically ~20%).