Private Equity is about investing and funding companies which are usually not listed on a stock exchange. But sometimes private equity firms can buyout an entire company on the stock market and change it’s status from being a public corporation to being a private company.
In most cases private equity firms make money when they buy a business for less and selling it for more. Of course, there are several ways a private equity firm can do this. For example, a private equity firm can also engage in what is called leveraged buyouts (LBOs) and that’s using borrowed money to make further investments into a target company which a PE firm is interested in.
NOTE: Private equity is NOT limited to leveraged buyouts. This is simply an option a private equity firm will utilize after concluding that the target company has a number of assets which they can sell or use as collateral to repay the loan.
The Goals of Private Equity Firms
Private equity firms are more concerned with restructuring the target company and will typically look to hold investments for a period between five and sometimes up to ten years.
The idea is to try to improve the value of the investment through making changes to the management and at the same time they can choose to downsize the workforce of a company to reduce costs.
When the private equity firm is satisfied with it’s investment the next step is to find an exit either through the stock market or by selling the investment to another corporate entity or an individual investor.
Private Equity Firms and IPOs
A private firm can also initiate an IPO on the share market and subsequently proceed to purchase heaps of shares thereby driving up the price of the shares.
From there they entice other investors to buy shares and when the company reaches over priced levels, the private equity investors sell the shares to those who are still buying. Hence they will make huge profits and walk away from the investment.
Those who are left, lose their investment as the value of the company collapses. This is a ruthless investment scheme that causes huge job losses and economic disruption.