Investors form private equity companies when they want to invest in other businesses. This company structure allows them to spend without having to buy stock. They use investor funds to purchase and enhance the value of the other companies. This value enhancement can involve cutting costs and increasing the company’s growth. People sometimes revile private equity arrangements because they often lead to significant layoffs. They also often lead to the creation of new jobs.
So what’s the difference between venture capital and private equity? People often confuse the two concepts. Both refer to firms that invest in companies and exit through selling their assets. They use equity financing, such as initial public offerings to sell these assets. There are differences, however. Private equity firms usually buy mature companies. Venture capital firms tend to invest in startups. Another difference is that PE firms invest 100 percent in companies. Venture capitalists spend 50 percent or less.
Who is in Private Equity?
Some of the top private equity firms in the US are The Carlyle Group, Blackstone, and KKR. Apollo Global Management, CVC Capital Partners, and Warburg Pincus are also in the top ten. Other notable firms include EQT, Neuberger Berman Group, and Silver Lake. Bain Capital holds the twelfth position.
Why Private Equity?
The private equity approach has several benefits, especially in emerging and frontier markets. Such markets are more likely to misprice their assets, creating significant opportunities. Private equity investors can get inside information about their portfolio companies. Thus they get more value from their investments than stockowners.
Many business owners partner with a private equity firm to take their business to the next level. They often make this decision when the company reaches a critical point, and the owner decides to sell all or part of it. Private equity enables firms to gain extra capital for acquisitions or expansions. It also gives them an aligned partner who can help them grow.
The Future of Private Equity
The private equity industry’s fantastic recovery since the financial crisis was remarkable. The industry has grown – and continues to grow – at a furious pace. It was on the ropes only a decade ago. Industry experts expect continued growth over the next decade. They also predict that wealthy individuals will generate considerable demand for private equity.
At present, private equity firms do the biggest deals in the US. The US is also their most significant source of capital. More capital is invested in the US than in any other part of the world. Industry players expect that private equity investment will become much more balanced. Emerging and developed economies will share the pie. They also predict that private equity firms will merge operations. The larger firms will buy out the smaller, independent ones.
Digital Innovation in Private Equity
Private equity firms consider digital innovation when deciding to invest in a company. These firms must conduct due diligence on potential investments. Due diligence enables them to find out the level of digital maturity of the target company. Private equity firms can also use new disruptive technologies to optimize their operations.
What Makes An Attractive PE Target?
The following factors generally make a strong Private Equity target.
- Strong Free Cash Flow (FCF) Generation
- Limited Free Cash Flow (FCF) cyclicality
- Leading and defensible market positions
- Limited outside threats
- Growth opportunities
- Efficiency enhancement opportunities
- Low Capital Expenditure requirements and Net Working Capital requirements
- Strong Asset base
- Proven management team that can stay on and perform
- Clean Balance Sheet
- Potential for immediate asset sales
- Ability to operate the business more effectively without public scrutiny
- Viable exit strategy
- Reasonable acquisition price
Why Private Equity Market Research is Important
Information is by far the most valuable asset in financial markets. Market Research is essential because investors rely on the information gleaned. This information helps them decide on investments. Traders need data to know whether they should do a deal. Corporate financiers need information to value companies and take part in transactions.
PE Professionals tend to prefer to use as little of their own money as possible and generate the highest return on the money they invest.
Two common challenges and opportunities for PE firms are:
- Finding the best companies to LBO
- Finding ways to create value in the companies they buy
We provide expert and Key Opinion Leader interviews to help PE professionals with both deal sourcing and improving the companies they buy.
Some private equity firms use a team of analysts to do their market research. Others outsource this task to streamline their operations. As long as the PE firm can ensure the quality of its information, outsourcing can be beneficial.
About SIS FinTech Research and Consulting
SIS FinTech Research and Consulting provides Insights, Data, Strategies and Corporate Intelligence to capture new opportunities. We provide:
- Focus Groups
- Industry Tracking
- Market Intelligence
- Opportunity Identification and Analysis
- Product Testing
- In-Store Research
- B2B Executive Interviews
- Statistical Analysis
- Data Collection