What are private equity firms all about? I mean, I just don't understand a s h i t about this..?

Question

Please, disregard the last question mark.

Answer 1

Private equity funds raise large pools of money (their "funds") from institutions and high net worth investors to invest in companies. They are generally unregulated or self-regulated. Private equity funds target insitutions and wealthy individuals because you have to be deemed a "qualified" or "sophisticated" buyer under securities laws, so these funds are not available to every investor.

Private equity firms can buy controlling equity stakes (ownership) in companies, or invest in various forms of non-traded securities (debt, preferred stock) and sometimes, they can even invest in publicly traded securities, depending on what the profile and strategy of the fund is.

Mostly, private equity firms will buy companies outright, leverage them (or borrow money for the purchase) and run them with an eye towards monetizing the investment through recapitalizations, a future sale or IPO.

Answer 2

their owned companies escape a lot of expensive and onerous rules that publicly owned firms have to put up with.

their managements are also out from under the "make this quarter better than all prior quarters" attitude that the stock markets seem to have taken lately. That means they can take actions that won't pay off for a couple of years or might be very unpopular [like cutting 25% of the work force, or closing all factories in America and sourcing the product from factories in Mexico].

recently, debt captial has been verycheap, so buyout firms have loaded up with it and used the cheap debt to buy whole companies. Effectively, this increases the debt ratio of the entire mass of acquired firms. However, since portfolio effects come into play fairly rapidly [number of companies owned = 10 or so], financial theory says the risk from added leverage for the whole entity is lower than that for the companies when they were stand alone.

It might also be that the buyout firm actually does have better managment than the purchased firm(s) and thus that they increase efficiency (and results) in other useful ways.


does this help?