Private equity is a term often used but rarely understood. Part of this misrepresentation belies the earlier, more aggressive buy-to-sell model that characterized much of its activity.
Australian investor, businessman and AFL opinion writer Darren Herft thinks that a deep understanding of private equity is vital for investors as well as businesses.
“Private equity is capital not listed on the public market. It is an alternative investment class, composed of funds and investors that directly invest in private companies, or buyout public companies,” says Darren Herft.
According to Darren Herft, private equity is being utilized to finance new technology, expand working capital, and bolster good businesses that need a little push to break new ground.
He says, “Private equity firms invest in various types of assets with the funds raised from both accredited and institutional investors.”
Vulture financing or distressed funding is one such avenue, arguably what has given private equity its historic bad rap. It involves the investing of capital into underperforming businesses or their auxiliaries.
“The goal of private equity firms with such businesses is to cut costs, often by trimming down its employees and other costs deemed unprofitable to then sell for a profit. This practice became quite commonplace in the years after the 2008 recession,” says Darren Herft.
Leveraged buyouts are another form of private equity investment and comprises the total buyout of a company. Here too, the firm’s goal is to improve efficiency by trimming down on unnecessary and unprofitable parts as well as an overhaul in its middle and upper management.
“After turning a company around, private equity firms may sell them off or conduct an IPO to get a great return on investment (ROI). They can then retain some part in the company or completely sell off their share to move on to the next project,” says Darren Herft.
The 2008 crisis led to a crash in real estate prices and led to a flow of private equity towards the sector.
“Real estate private equity differs from its counterparts as a type of investment as the funds are locked away for a longer period of time,” he adds.
Such financing also requires a higher minimum capital and is usually targeted towards commercial real estate and real estate investment trusts.
For early investors or those lower on the ladder when it comes to access to capital, funding of funds is a great gateway into the world of private equity according to Herft. This type of financing is targeted towards investments towards other funds such as hedge funds and/or mutual funds.
Venture capital is a popular form of investment, especially since the explosion of the start-up scene at a global scale. Venture capitalists focus on providing capital in the form of seed money, early-stage financing, or series A funds to entrepreneurs.
Herft says, “The sought-after candidates or ideas for such funding must set themselves apart either due to the transformative nature of their ideas or by portraying a robust business model that is likely to yield a good return on investment in the short run.”