What is Private Equity?

And why would you sell your company to them?

In a nutshell, Private Equity (PE) is a source of funding for private business that has a fixed life. Targeted investment with a finite term brings structure, direction and strong leadership. So, selling all, or part of your company to PE investors opens expansion opportunities, funds growth or simply brings liquidity.

In this article you’ll find out:

  • Where PE money comes from
  • How investments are structured
  • What the typical PE investor looks like

There can be a fair amount of jargon in the world of Private Equity, so let’s take a look at what some of the most commonly used terminology means.

PE jargon-busting

  • Private Equity (PE): A source of funding for private businesses, i.e., those that are not publicly traded
  • General Partners: The Private Equity firm
  • Limited Partnerships (LPs): Investment funds through which funds are managed
  • Limited Partners: Investors in the fund
  • Investment period: The first five years of a fund’s operation, after which no further investment can be made

Common sources of PE funding

Private Equity capital (sometimes referred to as ‘dry powder’) usually comes from institutional investors or Limited Partnerships such as:

  • Pension funds
  • Insurance companies
  • Sovereign wealth funds
  • Endowment funds – universities and not-for-profits

Over the last ten years or so, PE capital from sources such as these has greatly increased, resulting in huge amounts of money being ploughed into growing private businesses.

PE investment guidelines

PE funding comes from a number of investors, and the PE firm has ultimate control over where investments are made. There are, however, some clear rules that must be followed:

  • No one investment can account for more than a fixed percentage of the total fund (typically this is set at 10-15%)
  • Investments can only be made during the first five years of the fund. The next five are spent realising those investments.
  • A clear investment strategy must be followed, defining sector focus, geographical spread, size of deal and growth objectives (buy and build, operational improvements, cost cutting etc.)

Fund life is usually fixed at ten years, after which time the pre-agreed exit strategy will be implemented as PE investment in the company is realised.

Who are your PE partners?

Private Equity General Partners tend to hire candidates with backgrounds in investment banking, accounting and corporate finance, and management consultancy. They have typically been to the best universities, graduating with firsts or 2:1s in the top 10-15% of their cohorts. PE investors are ambitious and single-minded, strategic thinkers with analytical brains who get stuck into data and detail.

Why sell your company to PE?

Choosing Private Equity investment for your company brings new focus, structure and direction. Following clear parameters and a fixed timeline ensures the process is transparent – driving growth and optimising financial rewards. Experienced senior managers will guide the business towards improved profitability, setting tangible targets for departments and individuals and realising their full potential.

PepTalks has a wealth of experience to share for leaders and senior managers looking to understand more about how they can thrive under PE ownership. Along with regular webinars and events, we also offer a training programme to help Private Equity-backed leaders realise their own potential when it’s lonely or stressful at the helm. 

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