In its broadest sense, private equity is an ownership interest in a company or portion of a company that is not publicly owned, quoted or traded on a stock exchange.
In financial terms, private equity generally refers to equity-related finance designed to bring about positive change in a company, such as:
- Growing a new business
- Bringing about operational change
- Financing an acquisition
- Taking a public company private
Because private equity returns are achieved through operational improvements and financial restructuring, the experience and leadership ability of the private equity manager are paramount.
Private equity in a nutshell
The compelling case for
private equity
- The factors that drive returns in public equity markets have little or no impact in private equity, enhancing private equity’s diversification potential.
- Private ownership enables long-term strategic focus as opposed to the public market focus on quarterly earnings. This “patient” perspective has the potential to generate significant return on investment.
- As a whole, private equity has exhibited attractive performance on both a risk-adjusted and an absolute basis.
Private equity: Comparison to public equity
The investor’s role:
Generally, investing in private equity involves three phases:
- Capital Commitment. An investor signs a legally binding agreement to pay a set amount of capital to a fund over a period of time, usually 3 to 5 years.
- Drawdown. The fund manager draws down (i.e., "calls") the investor's committed capital in increments as the manager finds attractive investments, typically with notice between 5 and 15 days beforehand.
- Distributions. The investor receives distributions as the manager "exits" investments (i.e., sells or takes the company through an initial public offering). These distributions are usually paid to the investor as cash, but sometimes they can be used to offset future drawdowns.
