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In the field of finance, private equity (PE) is capital stock in a private company that does not offer stock to the general public. Private equity is offered instead to specialized investment funds and limited partnerships that take an active role in the management and structuring of the companies. In casual usage, "private equity" can refer to these investment firms rather than the companies that they invest in. Private-equity capital is invested into a target company either by an investment management company (private equity firm), a venture capital fund, or an angel investor; each category of investor has specific financial goals, management preferences, and investment strategies for profiting from their investments. Each category of investor provides working capital to the target company to finance the expansion of the company with the development of new products and services, the restructuring of operations, management, and formal control and ownership of the company. As a financial product, the private-equity fund is a type of private capital for financing a long-term investment strategy in an illiquid business enterprise. Since the 1980s, the financial press describe "private equity fund" investment as the superficial rebranding of investment management companies who specialized in the leveraged buyout of financially weak companies. In assessing the returns of private equity, scholars provide mixed assessments. Some find that private equity outperforms public equity while others find no evidence of overperformance. Key features The typical structure / features of private-equity investment include: An investment manager (the private equity investor) raises money from institutional investors (e.g., hedge funds, pension funds, university endowments, and ultra-high-net-worth individuals) to pursue a particular investment strategy. The fundraise proceeds are placed into an investment fund, in which the investment manager acts as a General Partner (GP) and the institutional investors act as Limited Partners (LPs). The investment manager then purchases equity ownership stakes in companies using a combination of equity and debt financing, with the goal of generating returns on the equity invested, including any subsequent equity investments into the target companies, over a target horizon based on the particular investment fund and strategy (typically 4–7 years). From a financial modeling perspective, the primary levers available to private equity investors to drive returns are: Revenue growth Margin expansion (typically an EBITDA margin) Free cash flow generation / debt paydown Valuation multiple expansion (typically an Enterprise Value / EBITDA multiple) Value creation strategies can vary widely by private equity fund. For example, some investors may target increasing sales in new or existing markets (driving revenue growth), while others may look to reduce costs through headcount reduction (expanding margins). Many strategies incorporate some amount of corporate governance restructuring, for example, setting up a Board of Directors or updating the target's managerial reporting structure. The use of debt financing in acquiring companies increases an investment's return on equity by reducing the amount of initial equity required to purchase the target. Moreover, the interest payments are tax-deductible, so the debt financing reduces corporate taxes and thus increases total after-tax cash flows generated by the business. Following a series of high-profile bankruptcies, aggressive leverage usage by private equity funds has declined in recent decades – in 2005, approximately 70% of the average private equity acquisition represented debt, while this percentage was closer to 50% in 2020. Firms that assume large operational risks (e.g., "turnarounds") will usually apply far lower leverage levels to acquired companies in order to provide management with more financial flexibility; firms taking fewer operational risks will often try to maximize available leverage and focus on investments that generate strong, stable cash flows needed to service the higher debt balances. Over time, "private equity" has come to refer to many different investment strategies, including leveraged buyout, distressed securities, venture capital, growth capital, and mezzanine capital. One of the most noteworthy differences between leveraged buyouts and the other strategies is that buyouts are generally "control equity positions", as buyout funds usually purchase majority ownership stakes in their target companies, while other investment strategies typically purchase minority ("non-control") ownership stakes, reducing their ability to effect transformational changes across target companies. For large deals, private-equity investors often invest together in a syndicate, in order to jointly benefit from exposure diversification, complementary investor information and skills, and heightened connectivity for future investments. Strategies The strategies private-equity firms may use are as follows, leveraged buyout being the most common. Leveraged buyout Leveraged buyout (LBO) refers to a strategy of making equity investments as part of a transaction in which a company, business unit, or business asset is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these transactions are typically mature and generate operating cash flows. Private-equity firms view target companies as either Platform companies, which have sufficient scale and a successful business model to act as a stand-alone entity, or as add-on / tuck-in / bolt-on acquisitions, which would include companies with insufficient scale or other deficits. Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition. To do this, the financial sponsor will raise acquisition debt, which looks to the cash flows of the acquisition target to make interest and principal payments. Acquisition debt in an LBO is often non-recourse to the financial sponsor and has no claim on other investments managed by the financial sponsor. Therefore, an LBO transaction's financial structure is particularly attractive to a fund's limited partners, allowing them the benefits of leverage, but limiting the degree of recourse of that leverage. This kind of financing structure leverage benefits an LBO's financial sponsor in two ways: (1) the investor only needs to provide a fraction of the capital for the acquisition, and (2) the returns to the investor will be enhanced, as long as the return on assets exceeds the cost of the debt. As a percentage of the purchase price for a leverage buyout target, the amount of debt used to finance a transaction varies according to the financial condition and history of the acquisition target, market conditions, the willingness of lenders to extend credit (both to the LBO's financial sponsors and .... Discover the Equity Press popular books. Find the top 100 most popular Equity Press books.