Another Finance Post: What is Private Equity?

What is private equity?

For many, private equity just more financial-ese. For others, it’s an investment arena they’ll never get into. For some it’s the only way to keep a business running, and for the lucky few it’s a way to make big money fast.

Equity is the portion of something that you own (a share if many people have own portions). It’s the monetary representation of ownership. More specifically it’s assets – liabilities, essentially the amount you own minus the amount you owe. Own minus owe! For example, if you are working on paying off a boat worth $40,000 but you still need to pay $20,000 before it’s truly yours – you have $20,000 in equity. The boat you own (the asset) is worth $40,000 but you have a debt (the liability) of $20,000 that you still owe on it.

This is equity at a basic level. So what’s private equity?

If you have equity in a company, you have partial ownership of the company. Equity securities can be bought and sold, they’re the private equivalent to stocks. While stocks are traded publicly on the stock market (eg. Apple stocks are bought and sold on the stock market, because Apple is publicly traded), equity securities are only for “privately-traded” companies and are traded in a different market.

Private equity firms are similar to venture capital firms, in that they invest in companies that need capital. Unlike venture capital firms, they tend to invest in what they call “middle” to “high” market companies. These are companies that are established, and meet a certain size, age or revenue requirement. The investors that put their money in private equity funds are usually wealthy and/or experienced, because the minimum investment for these funds is usually very high (often $250,000 or more).

When private equity firms are raising funds, they are reaching out to investors and showing off their portfolio. After the firm has reached adequate funding, they go out and purchase shares (equity) in private companies. Usually the company is struggling a little or needs capital for an expansion or to go in a new direction – and if all goes well the private equity fund will get significant returns after the company sees an increase in revenue, and the investors profit. A popular form of investment is to buy a portion of the company, or the entire company (acquisition), also known as a leveraged buyout.

Private equity firms are kind of a big deal. They have crazy high fee percentages (how much they charge the company for their investment), as well as getting a certain percentage of revenue from the company they’ve invested in. Partners in private equity can be making half a million to a million dollars a year, in some instances! Money matters aside, private equity is a pretty interesting concept and process – people sometimes forget that there is a separate market for privately traded companies (that may or may not yield better results than the stock market). With wealthier investors, less people, and more regulations – it might be an option to explore in the future if you’re looking to invest. Or if you’re looking to make bank career-wise.

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