The term private equity firm is one that can be confusing for some people, but in this article we’ll look at exactly what constitutes what sometimes quite a controversial type of company. Firstly, we’ll break down what the different parts of the term actually mean. Equity is the entire value of a given asset, minus and associated liability.
The term ‘private equity’ means an asset that is not freely tradable on any given stock market – that is, ordinary members of the public or investors cannot buy shares in the asset. So the term private equity firm is the partner involved in the investment that controls how the investment is managed. There might be a wide range of partnerships involved in the group (who have pooled all their financial muscle together), but the private equity firm will be where all the major decisions are made.
The investment will have been highlighted as one that may well hold significant promise in the years ahead.
There a very wide range of different investment strategies used by private equity compnaies, such as sourcing funding – that is venture capital – for their investment plans. It is quite a common practice for the private equity firm to purchase undervalued firms or indeed companies that have been under appreciated. They will then attempt to improve them and sell them off for a profit. The process might be compared to ‘house flipping’ but transferred to a commercial setting.
One of the key things that they do is immediately remove the company from the stock market. Doing this permits them to make difficult or indeed controversial decisions without the need to deal with shareholder questions or concerns. They also will not need to release information that might be considered sensitive – and will not receive negativity from the public in general. The process of making the company private means that the private equity firm is only accountable to a small group of investors.
The management team that gets installed will often be quite brutal in terms of cutting out parts of the company that no longer make a profit, and will keep parts that do turn a profit. This process may well involve the loss of some jobs but in many cases a lot of the original employees will be kept on – as many of them will know the business and surrounding market place in great detail.
This kind of firm remains an important if controversial player in the modern economy.