Understanding Private Equity Firms in 10 Short Points

Understanding Private Equity Firms in 10 Short Points

  1. Private equity firms enable investors to directly invest in companies with a group of other investors.
  2. Like other businesses, their purpose is to create profit for their investors. This is accomplished by purchasing companies, increasing their values and selling them at a profit.
  3. Private equity firms raise funds to invest in buying and selling businesses from institutions, wealthy individuals and other investors. After raising a specific amount, the PE firm will close the fund to new investors.
  4. Private equity funds are generally structured as limited partnerships, with the manager of the fund being called the General Partner and the investors who commit capital to the fund being called Limited Partners. The General Partner invests the fund’s capital, manages the portfolio of investments, and executes exit events. Limited Partners are passive investors who receive distributions from the fund.
  5. PE firms have very specific criteria, and for example, usually look to purchase businesses within a certain revenue range, profitability, sector and geography.
  6. When buying a company, Private Equity firms generally purchase a controlling interest or an entire business. Some PE firms will prefer that the seller retain some ownership interest moving forward as an incentive for a smooth transition and to align post-transaction interests.
  7. The first acquisition in a specific industry is typically called a “platform” company. Additional companies acquired to help the platform company grow and to increase revenue and profitability are called “add-ons”.
  8. Each company purchased by the fund is held by the PE firm for generally between 3 to 10 years. During this time, the PE firm works with the management to maximize the company’s valuation, which is usually based on a multiple of the adjusted earnings (sometimes referred to as “EBITDA”, which stands for earnings before interest, taxes, depreciation, and amortization). The fund is liquidated when all the purchased, or “portfolio”, companies are sold.
  9. Private equity firms generally sell a purchased business to another PE firm, a larger company, or they may take the company public.
  10. Depending upon the circumstances and the PE firm’s preferred model, current owners and/or management may stay on to continue running the business for the PE firm, take on a more strategic role, be required to work only during a transition period or be asked to be otherwise accessible.

Protegrity is a merger and acquisition advisor, representing mid-sized companies headquartered on Long Island, across the United States, and internationally. We have established relationships with highly qualified private equity and other strategic buyers who look to us for deals. If you are a business owner considering the sale of your company in the future, contact us now at (631) 619-6745 for a no-obligation consultation.