When people hear the term private equity, they are often unsure what it means but can sense that whatever it is, it’s above their pay grade. And in most cases, they are absolutely right.
Private equity refers to funds raised in the private sector to purchase an ownership stake in a company. Private equity firms pool funds from wealthy investors to make targeted improvements to a company in an effort to increase its value and sell it at a profit. Many private equity firms require a minimum investment of $250,000, a figure higher than most people have in their rainy day fund. Private equity deal management software is essential in the daily management of these million-dollar investments.
In addition to private funds made up of wealthy investors, pension funds and other institutional investors such as insurance companies and endowment funds play a large role in the private equity investment landscape. Funding with private equity is different from publicly traded companies because instead of selling shares of stock to thousands of individual investors with the goal of generating steady growth over many years, the wealthy investors in private equity firms want to see a return on their investment within a period of four to seven years.
Although struggling companies are a frequent target of private equity investment groups, they sometimes acquire profitable firms that they feel have not realized their full potential. Because of the relatively short time period available to generate the needed profit, the strategies employed by private equity firms to maximize their investment often seem drastic to a public accustomed to more traditional investment models.
Often private equity firms are willing to take dramatic steps to turn a company around. Strategies such as replacing entire management teams, shelving underperforming products, and laying off employees are all common approaches to quickly eliminate revenue drainers and maximize profitability. While these types of maneuvers have a high human cost are often very unpopular within the targeted company and surrounding community, they are implemented for a very simple reason – they usually work.
The success of private equity funds has led to a proliferation of firms seeking high-powered investors to provide funding for established companies that could use a boost, and in some cases, even start-up companies seeking more funds than banks are prepared to lend. This has also resulted in an increased need for high-quality private equity deal management software to keep track of these high-risk, high-reward investments.
Even though the fast-moving world of private equity investment is out of reach for most people, the effects of this type of high-dollar investing are often the underlying reason behind the corporate decisions that may at first glance seem inexplicable. Although the moves made by private equity firms can result in short-term pain, the ultimate success of the streamlined company could benefit more people in the long run.