Exploring Private Equity Fundamentals

Private equity refers to investment funds that acquire private companies or take public companies private. These funds are not listed on public exchanges and are typically locked in for longer periods, often aiming for substantial returns.

Private equity firms often use a combination of debt and equity to fund their acquisitions. The typical structure includes the general partner (GP), who manages the fund, and limited partners (LPs), usually institutional or accredited investors.

Private equity firms create value through operational improvements, financial restructuring, and strategic acquisitions. They actively manage portfolio companies to increase their value before exiting via a sale or an IPO.

A leveraged buyout (LBO) is a common strategy where a firm acquires a company primarily through debt. The acquired company's assets are used as collateral, aiming to repay the debt from the company's cash flow.

The effect of private equity on employment is complex. Some studies suggest PE acquisitions lead to job losses due to cost-cutting, while others point to job creation in the long term through company growth.

Private equity historically outperformed public markets, particularly during market downturns. However, performance varies widely among firms. Top-quartile firms significantly outperform others, demonstrating the importance of manager selection.

Investors in private equity trade liquidity for potentially higher returns. The illiquidity premium is the excess return that investors demand for locking up their capital, often for ten years or more, in these investments.

Did you know? Dunkin' Donuts was taken private in a $2.4 billion deal by a private equity firm and later re-emerged even stronger through an IPO!