Do you have a good business idea or looking to expand your existing business or want to get out of struggling business but have no funds to do so? Then this write-up is for you. There are some firms in the market, often called private equity firms, which offer financial support to your idea or business if they like your proposals.
The term private equity is not known to many people outside the business world but it plays an important role in global business. Private equity is a capital invested in different companies to acquire equity stakes. These firms fund businesses, new technologies, offer higher working capital, make acquisitions, buy out companies, offer funds to struggling businesses, etc.
The investment that is used to own the stakes of a company is funded by private equity firms, venture capital firms or angel investors. These are also called as financial sponsors. These firms pool money from different sources like insurance companies, pension funds and high net worth individuals.
Generally, private equity firms acquire a company or organization through Leverage Buyout (LBO). The main intention of these firms is to improve the company's performance so that the other investors can buy the company. At times, they may also change the management of the company or take other crucial decisions to gain returns.
In simple terms, private equity firms invest their money in struggling companies or those which needs money. And once they start doing well, the stakes or shares are sold to other companies or in the form of issuing IPOs (Initial Public Offer). This is how these private equity entities make money.
Equity firms make money by issuing IPOs (Initial Public Offer) and also by selling the company to other investors.
Leveraged Buyout(LBO): It occurs when a financial sponsor acquires a company (equities) or a part of a company using borrowed funds (bonds or loans). And the equities owned are used as collateral for borrowed funds.
Note: The companies which get private equity will not be able to issue or sell shares.