Private equity investors generally work towards funding new technology, making new acquisitions, expanding working capital and bolstering balance sheets of companies. Private Equity firms also work in the same manner like Venture Capitalists -- invest in the long term in startups to help them grow and then reap benefits after the companies go public or merge with other firms.
However, PEs are different as unlike Venture Capitalists who only invest in startups they invest in mature companies also that seek funds to improve their performance. Private Equities make money from management fees and also charge performance fees for sale or turnaround growth of the company.
How Private Equity works
Private equity raises funds from institutional investors and wealthy individuals to invest in various assets. PEs invest in stressed assets, in leveraged buyouts of companies with the intention of solidifying its balance sheet or taking it to IPO. PEs also invest in REITs, funding in real estate, and also in Venture Capital funds.
Advantages of PE
Private equity offers several advantages to companies and startups.
1. PEs are favoured by firms because it allows them access to liquidity as an alternative to conventional financial mechanisms, such as high interest bank loans.
2. Certain forms of private equity, such as venture capital, also finance ideas and early stage companies/startups.
3. In the case of companies that are delisted, private equity financing can help such firms attempt unusual growth strategies away from the eyes of markets, as these companies don't have the constant pressure of publishing their quarterly earnings.