The Role of Private Equity Investment Firms
Private equity is a niche market that very few investors have heard about, let alone understand. Unlike stocks, futures, and forex, the private equity markets work their magic behind the scenes. Though they don’t get much attention, the fact is, private equity is the lifeblood of the economy. Without it, the USA could very well fall apart in a decade. You may be saying, “Wow, is that really true”? Well, in this article we will answer this question, defining the the various roles of private equity and its importance to economies worldwide.
In today’s market, “private equity” refers to any money invested with non-public companies which expects a yield for the use of the capital. Also, private equity can refer to buying public companies with the intention of making them private in the future. With either definition the idea is simple, private equity provides funding to companies that do not want to go public. As we will explain later, by choosing to not go public, there are a number of benefits these companies can receive by utilizing private equity. Now that we’ve covered this fundamental concept, let’s define the term private equity firm.
By definition, a “private equity firm” is a company which pools money to invest in non-public corporations, hoping to profit from growth. Since the private equity investors’ give legal authority to the manager, they can use their expertise to make the best investment decisions. In most cases, this involves a detailed analysis of the companies they are prospecting, in addition to whatever diversification strategy they implement. To help you understand what we mean, we will give you an example. One on hand, private equity firm “A” invests ONLY in biotechnology companies, diversifying amongst corporations at different stages of growth. On the other hand, private equity firm “B” ONLY invests in in the energy market, looking for late stage venture capital opportunities. Either way you slice it, the point is, each private equity manager has their own niche and strategy. By defining their niche, and becoming an expert in that specific area, the private equity firm can create its unique formula for success.
Private equity firms invest in every major industry, assisting both small and big corporations. Though they do help many small companies, the real economic impact comes from their assistance in “late-stage venture capital’ opportunities. By “late stage venture capital”, we mean companies which possess strong growth but not enough liquidity to reach their bigger goals. In many cases, you can have a company with huge potential, but not enough money to meet their product demand. By giving these companies thefunds to invest, it allows them to grow to their potential, adding money, ideas and jobs into the economy. The great part is, private equity creates a positive economic cycle, keeping new companies flowing into the market at all times. In addition, they provide seed capital for new innovations which better the lives of everyone. If you take a good look around you, many of the biggest companies in the world have been funded through private equity. In fact, technology firms of all kinds are receiving private equity funding right now! For example, even Palm, the once-dominant PDA and smart-phone provider received $325 Million from Elevation Partners. The reality is, deals like this happen every day, and most people never appreciate the critical role of private equity.
In summary, if there weren’t private equity firms around, the markets would be a very scary place. Companies would either have to go public, or bang their head again the “glass ceiling” forever. With private equity funding now available to many businesses, this option has removed the pressure to go public. As most eventually learn, being in the spotlight isn’t the best choice for some products. With stock markets now recovering, it has become a perfect environment for private equity firms to profit. Hopefully this new trend continues, because as you now know, private equity is a market that can make or break any economy.
InsideTrade LLC Staff
Phone: (949) 444-2111