When it comes to investing, many investors have a unique route by investing in a mutual fund or in the stock market. Today, private equity has gained a great amount of influence in the market, although there are very few people who actually understand the real meaning. But, what is private equity? And what do private equity professionals do on a daily basis?
What is the private equity industry?
Private equity is an alternative investment capital that is not publicly traded or listed. This is where investors raise capital to invest in private companies to help facilitate mergers and acquisitions, stabilise the company’s balance sheet, instigate new development or projects etc. The capital is often contributed by institutional or accredited investors.
What does a private equity professional do on a daily basis?
Preqin, a research firm states that real estate funds in private equity are expected to clock in 50% growth by 2023 to reach a market size of around $1.2 trillion.
Raising fund is generally done by a senior officer in a private equity fund. However, at times there will be a dedicated fundraising team that works within some of the larger funds. So basically, every four to five years, the senior officer will go door to door of international investors like banks, insurance companies, pension funds to raise money for their next fund. The cycle keeps repeating and when the current fund is to be closed i.e. fully spent, where 70-80% of the money has been invested in companies, the senior officer will then go out to raise another amount of fresh money.
Fundraising requires proper presentation of the past performance of the fund received, the strategy used and individuals who will be accountable for making investments. A proper presentation is required to convince institutions to invest in their firm.
When a company gets acquired, the company’s management needs to be done for a certain amount of years until it gets sold off. On the other hand, private equity professionals do not get involved in daily management of the companies however, they do monitor the performance and get involved in strategic decision making. This depends from firm to firm, where there are other firms that have their team that manages the investment of the company.
Source investments simply mean finding an investment. This part is taken care by mid-to-senior management. This involves looking out for potential targets, reaching out to right management of companies directly or via investment bank.
There are many private equity firms who are specialised in different sectors and regions. This team tends to have a strong knowledge of attractive companies within a specific sector. Also, they have great information regarding their potential targets and teams etc.
Selling off or exiting companies
Returns can only be obtained if the companies are sold at a profit. Most investments are kept typically for three to four years and can be sold after that time period. This process is generally taken care by the junior team under the supervision of the senior management team. Companies can be sold off through sale to another company or a sale to another private equity firm via an IPO on the stock market.