Private Equity Investing
Private equity investing is just what its name implies- it's an investment in a privately held company as opposed to an investment in stock that is publicly traded. The term "private equity investing" can refer to any of several strategies or types of investing in privately-held companies, or to the act of taking a public company private. There is a whole industry built around private equity investing, which is very profitable, but able to escape the extreme scrutiny that comes with the trading of public securities.
Private equity investing is normally done to get a company off the stock exchange in order to begin implementing new management methods. Then, after time has passed, the investors can hold an IPO (initial public offering) and go public again- often making more in profits than they originally invested. Most who get involved in private equity investing are investment bankers or wealthy individuals that can afford to have money tied up as they await a profit.
One of the most well-known forms of private equity investing is called a leveraged buyout. In a leveraged buyout, the private equity firm assumes debt in order to make the money needed to buy out a publicly traded company, or to purchase most of its stock (which will be taken off the market). The debt that the private equity firm incurs is repaid, with interest, by the earnings from the newly private company. In other cases, multiple private equity firms will put their resources together to pay for the deal, so the debt load is split evenly.
The majority of private equity investments don't involve buying the majority of the target company's stock. For example, venture capital is a type of private equity investing where the investor puts up money to pay for a company's start-up. Venture capital is usually used to start new biotechnology and other tech firms. Initially investing in one of these companies is extremely costly, and venture capital is used when no cheaper financing is available.
Even if a company isn't new, it may still need money to finance growth or major changes. Private equity investing in these situations is called growth capital, and it can come from many sources. Growth capital is best for companies that have proven themselves profitable, but lacks the working capital to grow the way its owners planned.
Most of what happens in private equity investing is indeed private. Securities law and government rules typically don't apply to private equity investing, so the normal operations of firms are hidden from the public eye intentionally. Private equity investing provides advantages that publicly owned companies cannot realize, such as low accountability and giant profit margins.