Private equity is the capital investment in a company or corporation that comes from individuals known as shareholders or stockholders who have bought stocks or shares within the company. This usually represents one person’s percentage of ownership in a certain company through the ratio of the shares he or she owns to its total outstanding shares or stocks.For example, Mr. Bynes decided to invest in Company A by buying 200 stocks. Company A, however, has 50,000 shares currently outstanding or currently owned by different stockholders such as Mr. Bynes. Therefore, Mr. Bynes has 0.4% of Company A which is computed by dividing 200 stocks by 50,000 stocks outstanding.
What is a Private Equity Firm?
A private equity firm is an institution that manages the investments in the private equity of corporations with the use of different investment strategies. Basically, it raises funds and invests these funds in companies from the sector it specializes in for the purpose of yielding or creating high investment returns for its investors.
What does a Private Equity Firm do?
Private equity firms raise funds from wealthy individuals, insurance companies, and the like. These funds will then be used by the firm to invest into the private equity of operating companies by buying or owning some shares or stocks. The amount of stocks that a private equity firm invests in is usually enough to own or provide them with so
me control of the operating company’s business decisions.
Now, the firm will work on improving the operations of the said company, close deals, and manage business decisions to improve the company’s standing in the market.
The last step that a private equity firm would do would be to exit or sell the company and incur a substantial amount of profit in the process. This usually takes 4 to 7 years after the investing, depending on the firm’s strategy and specific circumstances.
Private equity firms gain revenue or income through the dividends earned from the stocks throughout the period when the firm is in ownership of the shares. The cash inflow from exiting or selling of the company after improving its market standing is usually higher than the outflow or cost of the initial investment. Private equity firms also generate revenue by taking a cut of the profits they yield for investors, and the total amount of money they have under management.