PRIVATE EQUITY
PE is closely related to the concept of equity capital. It is a form of financing in which money or capital is invested in private companies
Typically, PE investments are made in unlisted, mature businesses with a track record of revenue generation and profitability in exchange for equity or ownership stakes.
A private equity company is a type of investment firm. They raise capital from investors
called limited partners (LPs). These include institutional investors such as pension funds
and insurance companies, but also family offices and wealthy individuals.
To invest in a company, PE firms raise capital to set up a fund – also called a
private equity fund. The fund manager of the PE fund, called the general
partner (GP), also contributes some of his own capital to the fund to ensure he
has “skin in the game”.
Once the PE firms have reached their fundraising target, they close the fund.
PE funds usually have a limited life of about ten years. When a PE fund is
launched, the GP usually takes responsibility for managing the fund and
selecting investments.
After the investors have committed capital at the fundraising stage, the fund
gradually calls on this capital during the initial phase of the investment period
– the first three to five years of the fund’s life. At the same time, the fund
starts deploying the capital by investing in opportunities selected by the GP. At
the end of the investment period, the fund will have completed its initial
investments and will focus on supporting the growth of the portfolio
companies.
In the final three to seven years, the harvesting or divestment period, most
investments are usually realised and the fund returns the money to investors.
Liquidation does not happen all at once. Rather, there are usually a series of
liquidations over several years. At the end of the harvesting period, the fund is
liquidated.