Private equity investment is a type of equity investment in a security which can not quoted on the stock exchange.
Distinctive Features
A private equity investment is different from other modes of equity investment. It would entail earmarking an unlisted company which has a strong management team and great cash flows, performing a detailed diligence and coming up with a business model that will realistically reflect the company's financial performance during the forthcoming years, negotiating an agreement for a meaningful role in the realization of those goals, negotiating a fair valuation for entry and reasonable assurance that returns targets will be achieved even in some unfavorable business conditions.
How It Works
Private equity firms are partnerships which become the general partners in the investment partnership. The investors become limited partners. The private equity firms have control over the company management. The general partner has to come up with the funds for the investment whereas the limited partner chooses the portfolio of investments of the partnership. The limited partners benefits through IPOs, sales, mergers, profits etc.
Advantages of Private Equity Investment
1) The funds which are generated through private equity are important for development of innovative products and growth of the industry.
2) Such funds are used for increasing working capital.
3) They are useful for facilitation of mergers and acquisitions.
4) They make a company stronger by augmenting its balance sheet.
5) They can be helpful to start ups, venture capitals and businesses which have been unable to get grants or loans.
6) Since the general partner takes care of the management of the company, there is no chance of interference from the limited partner.
7) The capital for private equities are raised by institutional and retail accredited investors who can generate large amounts of money in the long term.
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