Private Equity Firms

Private equity firms pool money from wealthy investors, pensions plans and other institutional investors, buying stakes in companies, improving and selling them at a profit.  They borrow from banks, using only a small portion of their own cash flow.  Their secret is the use of debt, usually 70 cents out of every dollar they invest.  They pile debt onto the companies they buy, freeing up their own cash.

Private equity is any type of equity investment in an asset where the equity is not freely tradeable on a public stock market.  Funds are raised on private markets.  Many private equity firms invest in companies listed on public exchanges and take them private.  Private equity investment includes leveraged buyout, venture capital, growth capital, angel investing and mezzanine capital.    Venture capital is considered a subset of private equity focused on investments in new and maturing companies.

Private equity funds usually are organized as limited partnerships (the Fund), and controlled by the private equity firm who acts as the general partner.  The fund obtains investments from pension funds, financial institutions and wealthy individuals, who become passive limited partners. 
Private equity firms receive a return on their investment by listing an IPO, making the stock available on the public stock exchange, or by a sale or merger of the company they control.

Private equity fund investment is a high risk, high return, for those who can afford to have their capital investment tied up.  In US., most funds require potential investors to qualify as accredited investors, which requires $2.5 million of net worth.  In 2006, public pension funds, banks and financial institutions together provided 40% of global commitments into private equity funds.  Others included corporate pension plans, insurance companies, endowments, family offices and foundations.  Fund of funds (private equity funds that invest in other private equity funds) accounted for 14% of global commitments. 
Public equity firms are under no obligation to publicly reveal the returns they realize from their investments.  With the power to buy the nation’s largest companies, they can transform the stock market by making companies beyond reach of the average investor.