Understanding the Complex World of Private Equity Investing

Private equity funds are complex financial constructions, but ones that can provide a wealth of additional funding for companies. In fact, without private equity, entrepreneurship couldn’t flourish. Managers like Marc Leder, who works for Sun Capital Partners, together with others, fund in excess of 50,000 deals each year, worth billions of dollars. But what is private equity, and how does it run into the billions?


What Is Private Equity?

The name really explains what private equity is: money from private sources. Usually, those sources are high net worth people who want to invest in companies that they believe will grow. It is common for a number of these individuals to come together, creating a partnership through which their investments are managed. Often, they also attract passive financial investors, pension funds, and financial institutions.

To really understand private equity funds, you have to understand what their partners are looking for, which is businesses that will grow tremendously. Usually, doing this means taking huge risks and many investors lose big quite regularly. This is why proper management is so important, so that the fund as a whole remains profitable even if some of the investments fail. Fund managers, meanwhile, are paid through a share of the profits and a percentage of the money made available by the investors.

Private equity is not only a source of risk capital, however. They don’t just put money in businesses they believe in, they also work very hard at making sure that those businesses thrive and survive. This is understandable, since they invest millions in those companies. Generally speaking, high net worth individuals have a lot of professional experience themselves, and they often go into the companies they invest in to use this experience on a strategic level. They help to attract new customers, forge new alliances, and more.

People like Marc Leder have to sift through hundreds and hundreds of proposals every month. Businesses look to attract private equity investors, since this will help them achieve sustainable growth. However, very few will actually grab the attention of the managers and really stand out. In order to be one of those chosen few, businesses need to understand what the private equity firm’s expectations are, and how they can meet those. The process is often very lengthy, with numerous discussions between financiers and entrepreneurs.

Common criteria that equity firms look for include:

  • Growth opportunity.
  • Market potential.
  • Exit opportunities.
  • Long term sustainability.
  • Management quality.

Businesses must present detailed business plans and presentations, in which they explain what their personal future vision is, and how they aim to achieve that. Critically, this is also an opportunity for them to make a lasting impression, convincing investors that they are worth their money. Having a brilliant management team in place is one of the key elements of this. Private equity managers are happy to come in and share their expertise, but they want to see that the business can run and sustain itself once they leave as well.