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What Is a Private Equity Firm?

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A private equity firm specializes in high risk investments that can produce impressively high rewards. They deal in those assets that aren’t normally available to the public to buy. Such a firm is made up of a collection of individuals who have joined forces to invest in this type of asset. Those who manage the investment will be rewarded with a share of the profits and a management fee.

A Closer Look at the Private Equity Firm

When we talk about equity we are referring to the value of an asset minus any liabilities. A firm that specializes in private equity looks to purchase a partial ownership in companies in the form of equity stakes. They get this equity from private placements, by companies and through sources such as venture capital. The firm will get its capital from wealthy investors. Then money can also come from pension funds and any entity interested in high risk investment. The firm will use the available capital to purchase private equity.

These firms that specialize in private equity tend to have long-term strategies for making money. They look for undervalued companies to invest in and then when this business starts to perform a bit better they can sell their equity for huge profits. It is standard for the firm to withdraw and company they invest in from the stock market temporarily. This gives them the space to make the changes needed to ensure profitability without having to worry about the rise and fall of share prices. It then becomes a private company and the other investors will be easier to deal with. Once they have gained control of the company it is usual for the firm to replace the management with a team they feel is more effective.

The firm will take a few years improving the functioning of the company they have invested in. Only when they are sure that the business is performing well will they once again make it a public company. They will then be able to see a huge return on their initial investment as they see a much higher share price on offer. It might only take 3 or 4 years before a firm has completely turned a failing company around and they can be handsomely rewarded for their efforts.

The Risk of Private Equity Firms

When things go as planned these private equity firms can make a huge amount of money. Of course there is a lot of risk associated with such an investment. If they can’t return a business to profitability they could end up losing a lot of money. There are no guarantees and these firms take a huge risk when they invest in any company and try to turn things around. The decisions they make can be very unpopular and this can cause a lot of friction between them and the workforce. Those who manage a private equity firm are special people who really have to be able to make decisions worth millions of dollars.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.

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