Private Equity Deals Explained

 

What is Private Equity?

It is when high net worth investors pool their money together to purchase large equity ownership in companies.  If the company being bought is currently traded on the stock market then it will most often be taken private with the new ownership.  The private equity will buy companies they feel are too bloated, have bad management and/or are losing ground in their respective market.  Basically, they are looking for companies that are a little bit or a lot on the ropes, so to speak.  Their goal is to turnaround that company by replacing management, reducing redundancy by using resources from other companies in their pool of companies or other measures to increase shareholder value.

Private Equity Firms

This is the common term when referring to private equity.  These firms use strategies very much like the leveraged buyout.  Where they will isolate a mature company within a specific category of business and using leverage will take purchase and take over operations.  This is much different then say venture capital firms that are always on the hunt to buy in to the next unicorn (billion dollar business) without taking majority ownership or control of operations.

The private equity firm will raise funds to purchase a company using debt that will be serviced by the cash flows of the company they are looking to buy.  The debt is typically non-recourse to whomever lent the money.  This structure is very attractive to the firm’s limited partners because they get the benefit of the leverage but participate in a very minor way if things go south.  This is a great scenario for all involved as long as the cashflow exceeds the expense of the debt.

How to get in to a Private Equity deal.

The average firm will require a minimum of $250,000.  It will completely depend of the firm and what their goals are and the size of their fund.  Some have million dollar plus minimums.  Only an accredited investor can get in on these deals.  An accredited investor is someone who has 1 million in net worth outside of their primary residence and/or makes $200,000 a year.  $300,000 a year if you’re married.  Many private equity firms get large contributions from institutions like colleges or pensions.  Usually the fund manager will put some of their own money in to the deal as well.

Another way these firms get money is buy utilizing placement agents.  These placement agents will go out and solicit on behalf of the fund to high net worth people.  These agents will typically be paid around 1% of any money they bring in to the fund.

How to get out of a Private Equity deal

Private equity by nature is a non-liquid investment.  This means that getting out of a deal is a challenge.  Reason being is the structure of private equity is such that the funds used to buy the companies of interest are locked in to the company(s).

The investors get their money back once the turnaround has been successful and the fund sells the company for a profit.  In some instances the firm will pay dividends with the cash flow from the companies.  This allows the investors to get some return on their money while they are waiting for the sale of the company to reap the major financial rewards.

Top Private Equity Firms

Here’s the top 10 largest firm in the world.

1.   Blackstone
2.   KKR
3.   Warburg
4.   Advent International
5.   The Carlyle Group
6.   Apollo Global Management
7.   CVC Capital Partners
8.   EnCap Investments
9.   TPG
10. EQT

Real Estate Private Equity

This is similar to regular private equity firms except the focus is on real estate.  Most Likely the investment will be used to purchase already built properties, such as apartments or commercial buildings.  Other deals use the money to buy actual land lots and they are developed over time.