Private equity is the money invested in firms that have not gone public, or in other words, firms not listed in the stock exchange. This can range from investing start-up capital in a brand new business to multibillion-dollar buyouts of well-known public corporations, like Burger King and Dunkin' Donuts. Usually, private equity investors - accredited individuals or institutions - will pool their money into a fund that is set up like a limited partnership, with a private equity firm as a general partner and investors as limited partners.
Investors are looking for long-term gains and usually make an investment between 5 to 20%. Investors are also often likely to take an active role in the company, becoming board members to cut costs, adding to the management team for more efficiency and trying out new technologies in order to leverage debts and grow business. To exit the agreement, equity investors can resell, merge or take the company public with an initial public offering (IPO).
Private equity investments are not subject to the same high level of government regulations as public stock offerings and are far less liquid than regular stock. In recent years, the private equity industry has seen massive growth in America with new deals making the news daily. There are several types of private equity strategies also, such as leveraged buyouts, growth capital, venture capital, seed capital, distressed investments and mezzanine capital (which is a combination of debt and equity).
With recent changes due to the global financial crisis, many private equity investors see this as a good opportunity to catch good investments. Like other times of financial turbulence, such as the late 80's and the initial dot com collapse, many investors took advantage of the opportunity and came out with huge returns while many struggling companies managed to get through tough times and come out ahead of the pack.