[2023] What is private equity? Get all your questions answered

Smart people invest. Surely you are a smart person.

But what is private equity really?

If the world of investments is already part of your life, or if you are seeking knowledge on the subject to enter it more assertively, you are in the right place.

Here you will find out more about what private equity is and how it works. Read on until the end.

What is private equity?

Private equity, or private equity (PE), is a type of investment fund that represents the participation or ownership of an entity that is not publicly traded or listed.

It comes as a source of investment capital from high net worth individuals and companies who buy stakes in private businesses or even acquire control of government companies with plans to convert them to private enterprise and take them off the stock exchanges.

Private equity how it works

Private Equity represents an industry composed of large institutional investors such as pension funds and large firms funded by certain accredited investors.

Private Equity works by involving direct investment (almost always with the aim of influencing or controlling the operations of a company) and this justifies the domination of the industry by funds that have very high financial resources.

The minimum capital for accredited investors varies according to the company and the type of fund.

Some may ask for $250,000, while others may ask for figures in excess of millions of dollars.

The main justification for this is the relentless search for the famous ROI – positive return on investment.

Shareholders come in knowing that the time frame for favorable returns is medium-long – 4 to 7 years.

The partners in private equity firms are responsible for raising funds and managing these resources in order to earn profits for the shareholders.

Types of private equity firms

A variety of investment preferences are chosen by Private Equity firms.

Many are passive investors who want 100% of management to try to grow the company and turn a profit, or are strict financiers. 

We know that many sellers see this approach as “commodities”, so other Private Equity firms consider themselves active investors – that is, they provide operational to management aiming to help build and make the company better.

One of the things that active Private Equity firms often have is a network with a large C-list, i.e. CFO and CEO of specific areas.

This can be a determining factor in increasing revenues.

They are also usually experts in having synergy and operational effectiveness.

It is a logical thing to think that sellers will always look favorably on investors who can bring something more special to the business to increase the value of the company over time.

Take a look at the promising businesses in the United States if you are interested in participating in one of Private Equity’s companies.

Private Equity and Investment Banking

There is a competitive race to finance start-ups and buy good companies that happens between Private Equity firms, more commonly called Private Equity funds, and the big investment banks (or vice versa?). 

Overseas, as you might guess, the biggest investment banks (the largest entities) are the ones who commonly facilitate the biggest deal closings.

We are talking about institutions such as:

• Goldman Sachs (GS),
• JPMorgan Chase (JPM),
• Citigroup (C).

For private equity companies, however, the funds are not so accessible to anyone who is not an accredited investor and they cannot allow a large number of investors (there is a limitation).

In contrast, the participation in the company by the founders of the investment fund is usually large.

Finally, one of the most prestigious and gigantic Private Equity funds makes its stock negotiations in a public way.

An example is the Blackstone Group (BX), which trades on the New York Stock Exchange and has been involved in acquisitions of companies such as MagicLab and Hilton Hotels.

Private Equity Brasil

If you are aware of initial public offerings, you must have already noticed that technology is the ball of the moment in the Brazilian investment atmosphere.

Innovative and technological ventures almost always go through private equity fundraising before reaching the stock markets.

Guess who is behind the startups? Yes, private equity.

Together with venture capital investments, private equity in Brazil broke through the R$ 10 billion mark in the first 3 months of 2021.

This represents a year-on-year increase of more than 87%.

Do you know what this means? That the private equity market is highly accepted and sought after in Brazil.

The people of Brazil are waking up and seeing that fixed income and keeping money in savings accounts is the biggest financial joke of the last decades.

The venture capital market has leveraged in the last few years with a sharp curve in the last 12 months.

Perhaps issues related to covid 19 have even helped in this regard.

When we talk about Coronavirus, we want to point out the social constraints and the massive acceptance of virtual solutions through the internet.

These factors were drivers of Private Equity Brazil from 2020 to 2021.

Records in this type of investments were realized in this period and the tendency is to increase even more.

Brazilians prefer the following segments for their investments:

• shopping centers and retail,
• IT – Information Technology,
• aesthetics and health,
• media and communication, and
• financial services.

All these data on investments, divestments, and funding were released by the Brazilian Private Equity and Venture Capital Association (ABVCAP) and the consultancy KPMG.

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