Private Equity

What Private Equity Really Does

​

Private equity firms raise capital from investors and use it to buy companies, improve them, and eventually sell them.

The improvement can involve:

• Updating technology

• Expanding to new markets

• Professionalizing management

• Cutting unnecessary costs

• Improving pricing strategies

• Improving supply chains

• Making acquisitions to scale up

PE is about active ownership, not passive investment in a business.  Investors can own funds that are the passive investments.  

​

How Private Equity Deals Are Structured

A standard PE fund typically lasts 10–12 years with these phases:

1. Investment period (years 1–5)
   The firm acquires companies (“portfolio companies”).

2. Value creation (years 2–8)
   Operational improvements, strategy upgrades, scaling.

3. Exit / realization (years 4–12)
   Companies are sold via:

   • Acquisition by another firm

   • Sale to a larger corporation

   • IPO

   • Merger with another portfolio company

 

How Returns Are Generated

PE returns typically come from:

• Capital gains: selling the company for more than the purchase price

• Operational improvements: higher profits = higher valuation

• Debt reduction: paying down company debt increases equity value

Some deals also include:

• Dividends from excess cash flow

• Partial sales (recapitalizations)

 

 

Core PE Strategies

​

1. Buyouts (LBOs – Leveraged Buyouts)

The classic PE strategy.
Firms acquire a controlling stake using a combination of:

• Equity (investor money)

• Debt (borrowed money)

Debt reduces the equity needed and can amplify returns.

Best suited for:
Mature companies with stable cash flow (healthcare, industrials, services, consumer products).

 

2. Growth Equity

Non-controlling investments in rapidly expanding companies.

These companies typically:

• Are profitable or near-profitable

• Need capital for expansion

• Have strong product-market fit

Mechanics:
Investors buy minority stakes and exit as the company grows or gets acquired.

 

3. Distressed / Turnaround

Buying companies in trouble — financial, operational, or both — at discounted prices.

Value is created by:

• Restructuring debt

• Replacing management

• Streamlining operations

 

4. Sector-Specialized PE

Firms focused on:

• Technology

• Healthcare

• Consumer and retail

• Industrials

• Energy

• Financial services

Sector expertise can significantly improve outcomes.

 

5. Secondaries

Buying stakes in existing PE funds or portfolio companies from other investors looking to exit early.

Provides:

• Faster distributions

• More transparency

• Shorter hold periods