What Are Private Equity Funds?
A private equity fund is an investment fund managed by a private equity firm and whose primary purpose is to buy a company, make some changes, and then sell it for a large profit. Historically, private equity funds were used as a way to invest in private companies. However in recent years, it has become more common for private equity funds to invest in public companies and take them private.
Private equity funds typically get their capital from large institutional investors such as pension funds and university endowments. Most institutional investors do not invest directly in privately held companies because they do not have the desire or expertise to get into the day-to-day management of the companies they invest in; thus they hire private equity firms to manage that aspect of their investment portfolio.
How Do Private Equity Firms Make Money?
Private equity firms have gotten a reputation for making money by buying companies, laying off workers, and then raiding pension plans or selling off assets as a way to make money. While that may be true in some cases, most private equity firms make money simply by selling companies for more than they paid for them. In order to do that, they might change the management team, help the company grow by bringing on new products or services, or by streamlining inefficiencies in sourcing or production. Sometimes private equity buys out an entire business and takes a major stake thus letting the current owners “take some of their money off of the table.”
How Do You Get Private Equity Funding?
Getting private equity funding is not something that happens overnight. It takes years. Here are some things you need to do.
Build a network. There are going to be a lot of decisions on the way to getting private equity funding so the first thing you need to do is build a network of mentors. You need experts in a variety of areas who can provide a sounding board and guide you through making your company attractive to private equity investors.
Know who you’re working with. The vast majority of companies that get private equity funding are expected to make major changes on their way to profitability. Change is never comfortable and it’s especially painful if you’re not working together with your investors toward the same goal. You’re going to be working with these people a long time so you need to know, and trust, who you’re working with.
Understand the comps. Everyone wants to know, “What is my business worth?” Looking at comps not only tells you what kind of valuations other companies are getting, it can also tell you which private equity funds might be looking for an opportunity to invest in a company like yours.
Know what makes your business attractive. A potential investment doesn’t necessarily have to be doing well to be attractive to private equity. Private equity firms are buying to sell; not buying to keep. They are focused on their exit strategy. They want to know, “How are we going to make money and who are we going to sell this company to?”
How the Attorneys at Calkins Law Firm Can Help
The attorneys at Calkins law firm can be a trusted resource when you want to explore whether private equity is right for your company. We can help connect you to other trusted advisors and help you find the right private equity investment to grow your company. Contact our law office today to learn more about how Calkins Law Firm can help you.