What Is Private Equity?

Let’s say you’re at a cocktail party and an attractive person walks up to you, smiles sweetly and asks, “So what do you do for a living?”

Now let’s say that you reply: “I’m into private equity.”

The most likely result is that the attractive person will pull a drooping facial expression and discreetly edge slowly away from you as a protective measure to guard against the all-too-common problem of dying of boredom.

But wait a minute! Private equity (called PE for short) can actually be a very stimulating topic because it involves an excellent way to earn truckloads of cash.

Also, consider this: A lot of truly cool people are into PE. Take multiple Super Bowl-winning NFL quarterback Steve Young. He’s in the NFL Hall of Fame, but what is his full-time job today? That’s right. He’s a full-time PE investor.

Do you know who else is into PE big time? A-Listers like Ashton Kutcher, Justin Timberlake, Kim Kardashian, and Beyoncé. Who’s the dreary bore now!

Okay, so it’s cool. But what exactly is PE? Basically, it’s a large pool of money raised by highly intelligent people who are good with numbers and the intricacies of business and finance. This money is then used to invest in or buy a company they believe shows great promise for future growth. Once a PE firm buys or invests in a company, that acquisition is now in its portfolio.

By the way, a PE investor can be a private individual or a formal company. Where do they get their pool of money? PE operators raise their money from limited partners (LPs), sometimes called external financial institutions. This can be anything from banks and Wall Street firms to other types of investment firms. PE funds are also raised from angel investors and venture capitalists.

Note that some of the money raised for PE comes from the individuals who own the PE firm. That’s why people – like Steve Young and Beyoncé – tend to get involved in PE. They have a lot of money, and they need to do something with it. They can’t just park all their moolah in a savings account or let the government siphon it off in taxes. PE is a powerful vehicle for people who already have money to make more money.

It’s common for 1% to 5% of a PE fund to be footed by a single investor. The good thing is that they tend to create jobs for others and stimulate the economy in the process

The money gleaned from LPs is managed by GPs. That stands for general partners. They oversee the day-to-day operations of the PE firm, make key investment decisions and provide management services to their portfolio companies. A PE firm generally charges 2% to 3% of profits in exchange for management.
One of the primary strategies of a PE firm is to build a company they bought into an even better, bigger and more profitable enterprise. They can then sell the whole shebang for a much greater amount that they purchased it for to make a god-like pile of cash. Remember to use private equity software, to keep track of investments and monitor success.