What is Private Equity - Careers, Salary & Research - IBI

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Comprehensive Financial Modeling and Valuation Analysis Course. Investment Banking - Private Equity - Hedge Fund
The Investment Banking Institute is recognized as the financial education and training leader, offering an accelerated career path for current finance professionals and all individuals seeking to enter the finance industry.

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Private equity is the business of making investments with private (not publicly traded) equity capital. Public equity is where companies raise equity capital publicly by listing their stock on publicly available stock exchanges for anybody and everybody to purchase shares (equity) in the company. Private equity is where money for investments is raised privately, from accredited investors who usually invest large sums of money. An accredited investor can be an individual or an institution. Accredited investors become Limited Partners in a Private Equity Fund where the General Partner is composed of the management team of the Private Equity Firm.

The General Partners are the group who actually conduct the investing activities, using some of their own capital, but primarily the capital invested into the fund by their Limited Partners. Private equity investors function similar to Investment Bankers, but where Investment Bankers advise on transactions, Private Equity investors make investments directly into private companies or conduct buyouts of public and private companies. Capital for private equity is raised from retail and institutional investors, and can be used to finance new products and technologies, expand working capital within an owned company, and make acquisitions, finance leveraged buyouts (LBOs), and other investments in which the equity is not publicly traded. A fund will typically make between 15 and 25 separate investments over a ten-year life, with no single investment exceeding 10% of the total commitment.

The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.

Many private equity firms conduct what are known as leveraged buyouts (LBOs) where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hopes of re-selling the company to another firm or cashing out via an IPO.


Venture capital looks for opportunities that are in the start up or early stages of development. It also tends to take a very active role in the development of the company. Recently, some investors have been referring to venture investing and buyout investing as “private equity investing.” This term can be confusing because some in the investment industry use the term “private equity” to refer only to buyout fund investing.


A hedge fund invests in stocks, bonds, commodities and derivatives and may even short securities. However, the equity positions tend to be small and the holding period for an investment is usually short-term.


Private equity funds are typically limited partnerships with a fixed term of 10 years, often with annual extensions and capital calls. At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund.

There is a wide array of types and styles of private equity and the term private equity has different connotations in different countries. Private equity investments can be divided into the following categories:

  • Leveraged Buyout (LBO) or simply Buyout: refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these transactions are typically more mature and generate operating cash flows.

  • Venture Capital: a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business. Venture capital is often sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth.

  • Growth Capital: refers to equity investments, most often minority investments, in more mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.

  • Distressed: can refer to investments in equity or debt securities of a distressed company, or a company where value can be unlocked as a result of a one-time opportunity (e.g., a change in government regulations or market dislocation). These categories can refer to a number of strategies, some of which straddle the definition of private equity.

  • Mezzanine Capital: refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company's capital structure that is senior to the company's common equity.

  • Real Estate Private Equity: in the context of private equity this will typically refer to the riskier end of the investment spectrum including "value added" and opportunity funds where the investments often more closely resemble leveraged buyouts than traditional real estate investments. Certain investors in private equity consider real estate to be a separate asset class.

  • Merchant Banking: negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies.


Venture capital is a type of private equity that is provided to new, high-growth companies with the notion of generating a return through an event such as an IPO or sale of the firm. Usually, over 50% of investments in venture capital/private equity comes from endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this investment class. The investment is usually for a period of five to seven years. Venture capital is excellent for new companies who have limited history that are not large enough to raise money in the public market and in addition are too newly formed to secure a credit via a bank loan or debt instrument. In exchange for exposure to the high risk that venture capitalists assume, venture capitalists hope to achieve a high rate of return over a relatively short period of time as well as get wide ranging control over company decisions; in addition to an ownership of the firm and its value.

Not all venture capitalists invest in “start-ups.” While venture firms will invest in companies that are in their initial start-up modes, venture capitalists will also invest in companies at various stages of the business life cycle. A venture capitalist may invest before there is a real product or company organized, known as “seed investing”, or may provide capital to start up a company in its first or second stages of development known as “early stage investing.” Also, the venture capitalist may provide financing to help a company grow beyond a critical mass to become more successful, known as “expansion stage financing.” At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround or recapitalization of public and private companies that represent favorable investment opportunities.

Venture capital professionals come from all walks of life. These individuals provide an important source of expertise for the emerging companies they finance. They know individuals in banks and brokerage firms, attorneys, accountants, and others needed to help new companies succeed. Some of the professionals include CEO’s, former corporate managers, investment consultants, scientist, engineers and entrepreneurs who have launched ventures of their own.

There are venture funds that will be broadly diversified and will invest in companies in various industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in only one technology.

Venture capital was instrumental in the success of companies like Cypress Seminonductor, Apple Computer, Intel, Amgen, GenenTech, Solectron, Cirrus Logic, Federal Express, Au Bon Pain, Gymboree, Brookstone, The Sports Authority and more.


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