Essential terms, explained simply
Essential terms, explained simply
Firstly: what is private pquity?
Private equity (PE) refers to investments made into private companies (those not listed on public stock exchanges) or the acquisition and privatization of public companies, with the aim of improving their operations, growth, or profitability before eventually selling them for a profit.
Private equity investing is split into a few major categories, which we will outline below: buyout, growth equity, venture capital, infrastructure, secondaries and distressed credit. Firms are run by investment teams–those that are in charge of the investments and fund portfolios are referred to as general partners (GPs), and those that provide capital for the funds are referred to as limited partners (LPs).
Limited Partner (LP)
A limited partner is an investor in a private equity fund who provides capital but does not manage investments. LPs are usually pension funds, endowments, or wealthy individuals.
LPs have limited liability and typically receive returns as the fund realizes profits through exits.
General Partner (GP)
A general partner is the private equity fund manager responsible for sourcing investments, managing portfolio companies, and executing exits.
GPs receive a management fee as well as a percentage of the fund’s profits, known as carried interest.
Buyout
A buyout is the acquisition of a controlling interest in a company, frequently by a private equity firm. The goal is to restructure, grow, or streamline the business for eventual resale.
Example: A PE firm purchases all outstanding shares of a publicly listed company, taking it private and aiming for higher value on sale.
Due Diligence
Due diligence is the process of thoroughly assessing an investment, typically before a buyout or acquisition. It involves reviewing finances, operations, legal factors, and market potential.
Successful due diligence helps PE firms minimize risk and make informed investment decisions.