what is a private equity fund?

Answer 1

A fund which buys majority stakes in companies and/or entire business units to restructure its capital, management and organization. Usually the targets are delisted (unless already unlisted), held private and restructured over a period of 3-7 years, and then again listed through an IPO.

Restructuring may be done through leveraged buyouts, venture capital, growth capital, angel investing, mezzanine debt, management share participation programmes and others.

Answer 2

Here is answer in simpler words:
5-10 people who have great experience in investment banking (likes of goldman, merrill Managing directors) come together and start a private equity firm and raise money (around 500m to 1bn) from wealthy individuals. This is done through the structure of fund i.e. the private equity firm will issue units in the fund and investor will buy these units and the money from the investor will go to the private equity firm.
Now once the PE firm has the money - they will start investing. Normally they buy medium sized or big firms (normally big PE firms or a few PE firms join together), who are in distress/troubled. PE firm buy them because the it sees potential in the firm i.e. if the distressed firm is restructured and properly managed then it can be turned into a profitable firm. So they buy then restructure it and in a few years sell it, making a big profit. The PE firm's management get % of the profit (say 20% of the total profit made) and a standard management fees (say 2% of the fund size) from the fund and the rest is transferred to the investors i.e. fund unit holders.

Leverage effect: if the PE firm wants to buy a firm for 100 million. They will raise money from the bank loan and will keep the distreessed firm as a collateral and raise say 70 million. The rest 30 million the PE firm will pay. So effectively the with 500m fund they can do transactions worth 1.5 billion.

P.S.: They hire juniors from Investment banks and pay loads. An associate gets around £75K base + 100-150% bonus. But very hard to get into.

Answer 3

Just as its name says - it is a firm that invests in private equity. If is not for the average Joe but for wealthier individuals. Private equity is not traded versus public equity would trade on stock exchange.