Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity typically refers to investment funds, generally organized as limited partnerships, that buy and restructure private companies.
In simple words, private equity is a kind of investment fund which is not quoted on a public exchange and is funded by independent or institutional investors who are capable of investing large sums of money for long period of time.
So now when we know that what the private equity is, let’s talk about few of its advantages:
- Huge funding amount: If the company is growing rapidly and all it needs to become the next big thing is a huge fund then private equity is the best option. It is the best of all the available options if you’re looking for a major investment before you make your next big step.
- Composed Investors: Private equity investors invest to make bigger profit in long run, they don’t look for short term profits which acts as an added benefit for the company.
- Selective & significant spend: Private equity firms are extremely selective and spend significant resource assessing the potential of companies, to understand the risks and how to mitigate them. This helps the company to re-evaluate every aspect of company which further helps in controlled growth of the organization.
Now since we already have a decent insight of private equity, why don’t we start talking about the types of equity funds already. Basically, private equity can be broadly classified into the following categories:
- Leveraged Buyout (LBO): A leveraged buyout (LBO) is one company’s acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.
- Venture Capital: Venture capital is a type of private equity fund which is provided by venture capital firms to the startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth .Venture capital generally comes from well-off investors, investment banks and any other financial institutions.
- Distressed Private Equity: In distressed private equity, firms invest in troubled companies’ Debt or Equity to take control of the companies during bankruptcy or restructuring processes, turn the companies around, and eventually sell them or take them public.
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