What is a Private Equity Firm and What Do They do?
A Private Equity (PE) firm invests in privately owned businesses …
… with the aim of increasing their value over time and eventually selling its investment for a return. PE firms may acquire a majority stake in a company or take a minority investment, depending on their strategy and the objectives of the existing shareholders.
1. They raise money from investors
Private equity firms typically raise investment funds from organisations such as pension funds, insurance companies, family offices and other institutional investors.
That capital is then invested into a portfolio of businesses that fit the fund’s investment strategy.
2. They invest in established businesses
PE firms invest in many different types of companies, but they commonly look for businesses with qualities such as:
- strong or growing profitability
- attractive market positions
- experienced management teams
- opportunities for further growth
- potential for acquisitions or geographic expansion
- scope to improve operations or margins
Founder-owned and family businesses can be particularly attractive where there is an opportunity to support the company’s next stage of growth.
3. They may buy all or part of the company
A PE transaction does not necessarily mean selling 100% of your business.
Some firms acquire a controlling stake while asking the existing owner or management team to retain or reinvest a proportion of their equity.
This allows the seller to realise some of the value they have already created while potentially benefiting again if the business grows and is sold at a higher value in the future.
4. They work with management to grow the business
Private equity is generally an active form of ownership.
Depending on the investment, a PE firm may support management with:
- strategic planning
- recruitment of senior leadership
- acquisitions
- geographic expansion
- investment in systems and technology
- operational improvements
- financial reporting and governance
The aim is ultimately to build a larger, stronger or more valuable business over the investment period.
5. Debt may form part of the funding
Some private equity acquisitions use a combination of investor capital and borrowing.
This is often referred to as a leveraged buyout, or LBO.
The amount and structure of debt varies considerably between transactions and will depend on factors such as the company’s cash flow, risk profile and the financing available.
6. They eventually look to sell their investment
Private equity firms are not normally permanent owners.
After a period of growing the business, they will usually look to realise their investment through a trade sale, a sale to another private equity investor, or occasionally a public market listing.
Holding periods vary, although PE investments are generally made with a medium to long-term exit in mind.
For a business owner, selling to private equity can therefore provide an opportunity to realise some value today while continuing to participate in the company’s future growth.
However, the right PE partner, deal structure and level of future involvement all matter.
For more detail, read our Selling a Business to Private Equity article, which explains how private equity transactions can be structured, what PE investors typically look for, and what owners should consider before accepting an investment.
You can also visit our Private Equity page for a broader overview of how a PE sale works and what it can mean for an owner who wants to realise value while remaining involved in the business.