Private equity investing refers to investments made by investment funds. These funds are usually organized as limited partnerships and buy companies. They invest in many industries, from energy to technology. The goal of these investments is to increase shareholder value. This type of investing requires significant risk. However, it is also very rewarding and can generate huge profits.
Private equity firms view businesses through a microscope, identifying hidden value. They may see parts of a business that would make more money if run by a different management team. Large public companies, for example, may have certain aspects of the business that need a fresh approach. Changing the management team may be the best way to bring new life to an organization.
Private equity funds typically make money from fees and performance fees. Their limited partners are individuals, pension funds, and endowments. Although these limited partners own a majority of the fund, they are not directly involved in the investment process. The fund managers will take the risk of making bad investment decisions, which may have negative consequences for investors.
Private equity funds target particular types of companies, such as promising young companies with excellent potential. Other types of companies may be more difficult to evaluate, but private equity funds specialize in several types of companies. Most often, they buy up all shares in a weak company, change the management, and improve the company’s performance. Eventually, they may sell the company to another company or take it public in an IPO.