CASE STUDY: PRIVATE EQUITY 101 

By Todd Kesselman | March 20, 2023

Private equity is an investment asset class that has gained significant popularity in recent years. Despite its widespread recognition, many individuals are still unfamiliar with its intricacies and potential benefits. In this article, we present a beginner's guide to private equity, providing an overview of its fundamental concepts, investment strategies, and key considerations.

  1. What is Private Equity? Private equity refers to investments made in privately-held companies that are not publicly traded on stock exchanges. Unlike public companies, which raise capital by selling shares to the general public, private equity investments are typically made by institutional investors, high-net-worth individuals, and private equity firms. These investments aim to generate long-term capital appreciation by actively managing and growing the underlying companies.

  2. Investment Strategies: Private equity encompasses various investment strategies, including venture capital, growth equity, and leveraged buyouts (LBOs). Venture capital focuses on early-stage and high-growth companies with the potential for substantial returns. Growth equity investments are made in more mature companies seeking capital to expand operations or pursue new opportunities. LBOs involve acquiring a controlling stake in established companies, often financed through a combination of equity and debt, with the aim of enhancing operational efficiency and profitability.

  3. Benefits and Risks: Private equity offers several potential benefits, such as attractive returns, diversification, and the opportunity to actively participate in the growth of promising businesses. Private equity investments are typically illiquid, meaning they cannot be easily bought or sold, which can provide long-term investment stability. However, it's important to consider the risks, including the potential for limited liquidity, longer investment horizons, and the possibility of investment loss.

  4. Due Diligence and Selection: Thorough due diligence is crucial when evaluating private equity opportunities. Investors should assess the track record and expertise of the private equity firm, its investment strategies, and the underlying companies in the portfolio. Factors to consider include the industry landscape, competitive positioning, management team, financial performance, and growth potential. Conducting comprehensive due diligence helps investors make informed decisions and mitigate risks.

  5. Investment Process and Structure: Private equity investments typically involve a fund structure, where investors pool their capital into a fund managed by the private equity firm. The fund manager makes investment decisions on behalf of the investors and charges management fees and carried interest based on the fund's performance. Investors commit their capital to the fund for a specified period, known as the lock-up period, during which they cannot withdraw their investment.

  6. Exit Strategies: A key aspect of private equity is the eventual exit from investments to realize returns. Common exit strategies include initial public offerings (IPOs), where the company goes public and shares are traded on a stock exchange, or strategic sales to other companies. Private equity firms may also sell their stakes to other private equity investors or undertake recapitalizations to distribute returns to investors. The exit strategy depends on factors such as market conditions, company performance, and the specific objectives of the private equity firm.

Private equity offers unique investment opportunities for those seeking long-term capital appreciation and active involvement in growing businesses. By understanding the basics of private equity, including its investment strategies, benefits, risks, due diligence process, investment structure, and exit strategies, individuals can make more informed investment decisions. As with any investment class, it's essential to conduct thorough research, seek professional advice when needed, and align investments with personal financial goals and risk tolerance. Private equity can be a rewarding asset class for those willing to embark on the journey of unlocking value in privately-held companies.