Private equity firm facts for kids

A private equity firm is a special type of company that helps other businesses grow. They do this by investing money in companies that are not yet listed on the stock market. These firms aim to make a profit by helping the companies they invest in become more successful.

Think of it like this: a private equity firm gathers money from different investors. They then use this money to buy a part of a private company. Their goal is to help that company improve and grow. After some time, they hope to sell their share of the company for more money than they paid.

What are Private Equity Firms?

Private equity firms are often called "financial sponsors." They collect large amounts of money, called "capital," from various investors. This money forms a "private equity fund." These funds are then used to invest in private companies.

The firms follow specific plans, or "investment strategies," when they invest. These plans can include:

• Leveraged buyouts: Buying a company mostly with borrowed money.
• Venture capital: Investing in new, growing companies, often called "startups."
• Growth capital: Investing in more mature companies to help them expand even further.

Some people have different opinions about how these firms make money. However, their main goal is always to help businesses grow and increase their value.

How Private Equity Firms Started

The idea of private equity firms began in the middle of the 1900s. Since the 1980s, they have grown a lot. This growth has happened in cycles, with times of fast expansion and times of slower activity.

In the early years, until about the year 2000, most private equity and venture capital firms were active mainly in the United States. Later, in the mid-1990s, rules for big investors in Europe became more flexible. This helped the private equity market grow a lot in Europe too.

How Private Equity Firms Work

Private equity firms and their investors usually buy a large part of a company. Sometimes they even buy the whole company. Once they own a part of a company, they work to make that investment more valuable.

They use different strategies to do this:

• Leveraged Buyouts: They buy a company using a lot of borrowed money.
• Venture Capital: They invest in new companies that are just starting up.
• Growth Capital: They invest in companies that are already established but want to grow bigger.

Private equity firms make money in a few ways:

• Selling Shares to the Public: They might sell shares of the company to the public in an initial public offering (IPO). This means the company's shares start trading on a stock market.
• Management Fees and Profits: They earn a regular fee for managing the investment fund. They also get a share of the profits when the companies they invested in do well.
• Recapitalization: They might give money back to their investors from the company's earnings. This can also happen by borrowing money or selling other financial assets.
• Selling the Company: They can sell the company they invested in to another company. This sale can be for cash or shares in the new company.

Private Equity vs. Hedge Funds

It's easy to confuse private equity firms with hedge funds, but they are different.

• Private Equity Firms:

* They make investments that last a long time. * They often focus on specific types of industries or companies where they have special knowledge. * They usually take an active role in managing the companies they invest in. They help these companies grow and manage risks.

• Hedge Funds:

* They usually make shorter-term investments. * They invest in things like stocks and other financial assets that can be bought and sold quickly. * They have less direct control over how a company operates. * Hedge funds often try to make money by predicting if a company's value will go up or down.

So, private equity firms are like long-term partners who help companies grow. Hedge funds are more like short-term traders who bet on the financial health of businesses.

Images for kids

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  Diagram showing how a private equity firm is structured.

See Also

• History of private equity and venture capital
• List of private-equity firms
• Management buyout