Definition: Private Equity firms are described as the investment fund companies that invest in the capital of the enterprise so as to acquire a strategic stake in it, once it is set up as a successful unit. The capital injected by private equity firms in a company which forms a part of their equity capital is termed as Private Equity.
Private Equity implies a technique to invest in the illiquid assets (companies) which are not registered on a recognized stock exchange or in the publicly traded asset, so as to make it a private one.
For this purpose, private equity firms partners with investors to invest money in the companies which are privately held, or in the companies which are involved in the buyouts of the public companies that lead to the delisting of public equity.
The composition of the Private Equity fund is just like a liability partnership, wherein General Partner is identified as one who is so appointed to raise capital from a pool of pension funds, high net-worth investors, angel investors, etc for the private equity firm.
The general partner plays the role of the fund manager and plans the portfolio of investment and also ascertains the Limited Partner’s capital commitment.
Limited Partner refers to the retail and institutional investors which include Angel investors, pension funds, charitable foundations, banks, insurance companies, university endowments, etc. who invest their money with the General Partner.
Limited Partners commit to invest their fund over the term of the private equity fund and contribute money when capital calls are made by the general partner of the fund.
Types of Private Equity
- Leveraged Buyout (LBO): Leveraged Buyout implies a transaction in which the private equity firms acquire another company or its asset, with the use of a combination of equity and a substantial amount of debt.
- Venture Capital (VC): It is a subtype of private equity, wherein equity investments are made in the companies that are not matured enough but innovative, for the purpose of expansion and making it successful. Venture Capital Funding types are given as under:
Stages of Venture Capital
There are four stages of venture capital:
- Growth Capital: It involves equity investment, especially minority ones, in the companies that seek for capital so as to expand or revamp its operations, take necessary steps towards new markets or fund a substantial portion, without affecting the company’s overall control.
Private Equity firms aim at improving the performance of the companies over time, in which they invest and then sell them off at a profit to generate good returns for the ones who invest in these companies.