Private equity firms acquire stakes in other companies. This is often done with the use of debt financing. This strategy seeks to buy and later sale a company for a capital gain. At times, private equity firms seek to influence and even change the management of companies whose shares were purchased.

What also happens is that the shares of publicly-traded companies are often taken off the stock market, becoming privately owned. Once a private equity firm improves the acquired company (i.e. makes more profitable), it later either gets it listed again, or resells it to other companies or investors.

Also, promising non-listed firms (i.e. start-ups, growing companies) are purchased or have an ownership stake taken by private equity firms. In that role, venture capital is provided. If a right investment is made, large profit potential is possible as private equity investments into companies such as Facebook show.

Since the time required for an invested capital to be returned with a profit takes time, private equity investors need to wait to get back their capital, which is also known as the private equity fund lock-up period. Withdrawing money during that time is not possible or incurs penalties.

However, this is not the case for stock investors who buy publicly traded shares of private equity firms as these shares can be sold at any time on the stock market. So, here we need to differentiate between an investor in a closed fund (non-listed) private equity fund and listed shares.

 

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Private Equity Investment Strategies​


Here we discuss how private equity firms invest to generate returns for their investment partners​. 

PE investment strategies differ substantially from most other funds