What is Private Equity

What is Private Equity ?

These are private investments made by private firms mostly (except couple of public trade companies such as KKR) who want to acquire other companies. Once they acquire them, they unlock the value and resell them to other buyers such as IPO or just any other buyer.

Structure of Private Equity is as follows:

"Private Equity" PE Firm owns a fund called "Private Equity Fund" and this fund owns the ultimate "PE Portfolio companies". Portfolio companies are the same companies that PE firm is trying to acquire using the PE Fund.

Life cycle of the PE fund is as follows:
PE firm raises and manages the investment made by investors by being the General Partner of the fund. Core investors are Limited Partners such that their liability is capped to the invested capital and they are not responsible for manager's activities.

A PE Firm acquires the new firm through 2 ways
1. Acquisition through Equity of Portfolio Companies
2. Acquisition through Debt of Portfolio Companies

• Type of investment under Equity Category are: "Venture Capital" and "Leverage Buyout (LBO)" 
• Type of investment under Debt Category are: "Mezzanine Financing" and "Distressed Debt"

GPs of the PE firms usually charge a money management fee (1-3.5%) on yearly basis (Fixed Fee) and an incentive fee (around 10-30%) of the realized profits during exit of the fund.

I will write more on 4 types of investment categories in another post another time.

Nitin