A private equity firm invests in a company with the goal of increasing its value. Typically, these firms invest in industries where they have experience and operational expertise. As such, they are better equipped to identify opportunities to improve company performance. Private equity firms have access to large amounts of capital and a team of experienced professionals who work together to achieve the goals of each firm.
Private equity firms typically screen dozens of potential targets for each deal. Some firms dedicate more resources to this process than others. Their team typically comes from investment banking or strategy consulting, but they may also have line-of-business experience. They use extensive networks to identify potential targets. Private equity firms work with high leverage, which can result in high returns, but carries a certain amount of risk. Toys “R” Us was another example of a public company that required a new management team.
Typically, PE firms aim to exit their investment within a few years. However, a limited partner will also receive a return on their investment. The private equity firm will keep 20% of the company’s profits, and the remaining portion will be split between the limited partners in proportion to their contributions. While venture capital and private equity have similar structures, there are some key differences.
A private equity firm will focus on improving the company’s profitability. While this may make the leadership nervous about job security, private equity firms do not drive companies to bankruptcy. Instead, they see value in the company’s employees. The investment process is referred to as a leveraged buyout, and requires private equity firms to borrow money to complete the deal.