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A private equity firm or private equity company (often described as a financial sponsor) is an investment management company that provides financial backing and makes investments in the private equity of a startup or of an existing operating company with the end goal to make a profit on its investments. The target companies are generally privately owned entities (not publicly listed), but on rare occasions a private equity firm may purchase the majority of a publicly listed company and delist the firm after the purchase.

To complete its investments, a private equity firm will raise funds from large institutional investors, family offices and others pools of capital (e.g. also other private-equity funds) which supply the equity. The money raised, often pooled into a fund, will be invested in accordance with one or more specific investment strategies including leveraged buyout, venture capital, and growth capital. Although the industry has developed and matured substantially since it was invented, there has been criticism of private equity firms because they have pocketed huge and controversial profits while stalking ever larger acquisition targets.

History

The history of private equity firms has occurred through a series of boom-and-bust cycles since the middle of the 20th century with significant growth since the 1980s. Within the broader private equity industry two distinct sub-industries, leveraged buyouts and venture capital, grew along parallel tracks.

In its early years through to roughly the year 2000, the private equity and venture capital asset firms were primarily active in the United States. With the second private equity boom in the mid-1990s and liberalization of regulation for institutional investors in Europe, a mature European private equity market emerged.

Business model

Private equity companies, acting as general partners with investors as limited partners, acquire a controlling or substantial minority position in a company and then look to maximize the value of that investment. Strategies include leveraged buyout (with borrowed capital), venture capital (for start ups), and growth capital (mature companies).

Private equity firms generally receive a return on investment through one of the following avenues:

• an initial public offering (IPO) — shares of the company are offered to the public, typically providing a partial immediate realization to the financial sponsor as well as a public market into which it can later sell additional shares;
• a periodic management fee as well as a share in the profits earned (carried interest) from a private-equity fund managed.
• a recapitalization — cash is distributed to the shareholders (in this case the financial sponsor) and its private-equity funds either from cash flow generated by the company or through raising debt or other securities to fund the distribution.
• a merger or acquisition — the company is sold for either cash or shares in another company;

Difference to hedge fund firms

Private equity firms characteristically make longer-hold investments in target industry sectors or specific investment areas where they have expertise. Private equity firms and funds differ from hedge fund firms which typically make shorter-term investments in securities and other more liquid assets within an industry sector, with less direct influence or control over the operations of a specific company. Where private equity firms take on operational roles to manage risks and achieve growth through long-term investments, hedge funds more frequently act as short-term traders betting on the up or down sides of a business or of an industry sector's financial health.

Rankings

According to Private Equity International's PEI 300 ranking, the largest private equity firms include The Blackstone Group, Kohlberg Kravis Roberts, EQT AB, Thoma Bravo, The Carlyle Group, TPG Capital, Advent International, Hg, General Atlantic, Warburg Pincus, Silver Lake, Goldman Sachs Principal Investment Group and Bain Capital. These firms are typically direct investors in companies rather than investors in the private equity asset class, and for the most part the largest private equity investment firms focused primarily on leveraged buyouts rather than venture capital.

Preqin ltd (formerly known as Private Equity Intelligence), an independent data provider, provides a ranking of the 25 largest private equity investment managers. Among the largest firms in that ranking were AlpInvest Partners, Ardian (formerly AXA Private Equity), AIG Investments, Goldman Sachs Private Equity Group, and Pantheon Ventures.

Because private equity firms are continuously in the process of raising, investing, and distributing their private equity funds, capital raised can often be the easiest metric to measure. Other metrics can include the total value of companies purchased by a firm or an estimate of the size of a firm's active portfolio plus capital available for new investments. As with any list that focuses on size, the list referenced above does not provide any indication as to relative investment performance of these funds or managers.

See also

• History of private equity and venture capital
• List of private-equity firms
• Management buyout

Further reading

• "A Dignified Death: Hospices in the U.S. are increasingly run by for-profit providers, and a lack of regulation allows them to deliver abysmal end-of-life care", by the editors, Scientific American, vol. 330, no. 2 (February 2024), pp. 68–69. "Today nearly three quarters of hospice agencies operate on a for-profit basis. The sector has become so lucrative that in recent years private equity firms and publicly traded corporations have been snapping up previously nonprofit hospices at record rates. This... has had pernicious effects on hospice care in the U.S." (p. 68.)

References

1. "What Private Equity Firms Are and How They Operate". Pro Publica. August 3, 2022.
2. ^ "The Strategic Secret of Private Equity". Harvard Business Review. September 2007.
3. "What Is a Private Equity Company? Understanding Key Functions". American Express. April 26, 2024.
4. A primer: Hedge funds, private equity & venture capital, USA Today, August 17, 2007.

External links

• Private equity – a guide for pension fund trustees. Pensions Investment Research Consultants for the Trades Union Congress.
• Krüger Andersen, Thomas. Legal Structure of Private Equity Funds. Private Equity and Hedge Funds 2007.
• Prowse, Stephen D. The Economics of the Private Equity Market, Federal Reserve Bank of Dallas, 1998.

• Alternative investment management companies
• Private equity firms