What is a private equity company and how does it make money?

Answer 1

Actually, I have a different take on this question. Private equity firms are different from Venture Capital firms even though they be mistaken to do the same thing.

Like the capital markets function of investment banks, private equity funds exist to raise money for companies in search of extra cash. Private Equity firms usually enter at the stage where companies already have a proven track record and are just looking for cash to grow. Private equity funds offer money to such companies in return for a stake in their ownership. As a result, they become co-owners, or even sole owners, of those companies. So to answer your question as to how they make money, they get usually humongous returns on the "cash cows" they invest in, a result of the stock they own in those companies.

Venture capital, on the other hand, refers to the provision of funds for new and developing businesses, while private equity is more usually associated with management buyouts (MBOs) and management buy-ins (MBIs). Venture Capital firms usually enter at the stage where firms are making losses and VCs aim to turnaround such companies.

Answer 2

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Answer 3

Typically, those are referred to as private equity funds, rather than private equity companies...

A private equity fund is a company that invests in stocks of companies that are not publicly traded. Typically, private equity funds invest in companies that are either well positioned, but poorly run (in which case they replace the management), or have surplus assets (in which case the surplus assets are sold following the acquisition), or have a steady stream of profits (in which case they simply hold the company for the sake of dividends it pays). If the company was bought for turnaround or because of surplus assets, the fund may eventually (after fixing it up) take it public.

There is also a special subclass of private equity called venture capital. The idea is still the same (buy a private company to eventually sell it in a public offering), but instead of companies with assets, cash flows, and operating history, venture capitalists deal with emerging, or start-up, companies that have none of those.

Answer 4

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