Private equity funds are pools of actively-managed capital that invest primarily in private—but also public companies—with the intent of improving operations and adding value. The fund managers seek to create value in the companies in which they invest by improving operations, reducing costs, selling non-core assets and maximizing cash flow.
Private equity funds specialize by: Strategy — venture capital, mezzanine, buyout, special situations Industry — business services, retail, technology, et al - Geography — North America, Europe, Asia, et al
And, they create value by pursuing four primary strategies: - Valuation arbitrage — acquiring a sizable position in the stock of undervalued companies, with the intent of improving its fundamentals and maximizing shareholder value
- Financial engineering — rearranging a company's capital structure to maximize equity value
- Operational enhancement — improving a company's operating earnings and cash flow by making changes to its products or services and controlling costs.
- Innovation — funding research and developing commercial applications for new discoveries, with the intent of introducing new products and concepts to the marketplace (usually applied by venture capitalists)
The Case for Private Equity
The potential benefits of private equity investing include: - A larger universe of companies in which to invest as some private equity managers invest in both public and private companies
- Historic returns have exceeded those of publicly traded companies*
- Low historic correlation with public equity and fixed income markets*
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