The World of Private Equity
The term private equity evokes many emotional reactions. Many investors have made a lot of money thanks to the strategies being followed by private equity companies. However, many companies no longer exist because of these private equity funds. The investments being made by these funds is rapidly growing. The money flowing in private equity deals where the acquisition target is valued at more than $1 billion is over a trillion dollars. The writing on the wall is clear, private equity funds have a lot of money, and they are looking for acquisition targets.
In this article, we will have a closer look at the some of the strategies which are commonly used by private equity firms in order to conduct business.
Why Do Private Equity Firms Make Money?
Private equity firms are known for acquiring businesses which are either publicly listed or privately owned parts of publicly listed companies. Their business is based on identifying companies which are not aggressively managed. As a result, the valuation of these companies is not very high. Private equity firms take complete control of these firms since the potential isnt readily apparent to the world. Private equity funds then make aggressive changes to the company.
Unlike public companies, these funds have a starting and an end date. Hence, the precise return on an investment made by the fund can be accurately measured. The idea is to turn around the company within a period of two to six years and then sell and move on the other opportunities. However, when private equity companies invest their money, they tend to monitor the performance of their investment constantly. Hence, these companies are always under the radar. The mere pressure of continuously being monitored ends up creating better performance in many instances.
Here are some of the features that help identify a typical private equity deal.
Challenges for Private Equity
Private equity funds are known to perform well under certain market conditions. When these market conditions change, these funds are likely to face a lot of challenges. Some of the problems are as follows:
The bottom line is that private equity is an effective way for conglomerates to spin off some of their non-core businesses. However, private equity is highly dependent on interest rates and is therefore cyclical. Investors need to be mindful of the interest rate cycle before they put their hard earned money into a private equity fund.
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