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A private equity firm is an
investment management Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be instituti ...
company that provides financial backing and makes investments in the
private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a typ ...
of
startup A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend ...
or operating companies through a variety of loosely affiliated investment strategies including
leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...
,
venture capital Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which h ...
, and
growth capital Growth capital (also called expansion capital and growth equity) is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new mark ...
. Often described as a
financial sponsor A financial sponsor is a private-equity investment firm, particularly a private equity firm that engages in leveraged buyout transactions. Sponsors and management In addition to bringing capital to a deal, financial sponsors are expected to bring ...
, each firm will raise
funds Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
that will be invested in accordance with one or more specific investment strategies. Typically, a private equity firm will raise pools of
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...
, or private-equity funds that supply the equity contributions for these transactions. Private equity firms will receive a periodic
management fee In the investment advisory industry, a management fee is a periodic payment that is paid by an investment fund to the fund's investment adviser for investment and portfolio management services. Often, the fee covers not only investment advisory serv ...
as well as a share in the profits earned (
carried interest Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager specifically in alternative investments (private equity and hedge funds). It is a performance fee, rewarding the manager for enhan ...
) from each private-equity fund managed. Private equity firms, with their investors, will acquire a controlling or substantial minority position in a company and then look to maximize the value of that investment. Private-equity firms generally receive a return on their investments through one of the following avenues: * an ''
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investm ...
'' (IPO) — shares of the company are offered to the public, typically providing a partial immediate realization to the financial sponsor as well as a public market into which it can later sell additional shares; * a ''
merger Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
'' or '' acquisition'' — the company is sold for either cash or shares in another company; * a '' recapitalization'' — cash is distributed to the shareholders (in this case the financial sponsor) and its private-equity funds either from cash flow generated by the company or through raising
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The d ...
or other securities to fund the distribution. Private equity firms characteristically make longer-hold investments in target industry sectors or specific investment areas where they have expertise. Private equity firms and investment funds should not be confused with hedge fund firms which typically make shorter-term investments in securities and other more liquid assets within an industry sector but with less direct influence or control over the operations of a specific company. Where private equity firms take on operational roles to manage risks and achieve growth through long term investments, hedge funds more frequently act as short-term traders of securities betting on both the up and down sides of a business or of an industry sector's financial health.


Ranking private equity firms

According to an updated 2008 ranking created by industry magazine Private Equity InternationalTop 50 PE funds
from Private equity international (The PEI 50), the largest private equity firms include
The Carlyle Group The Carlyle Group is a multinational private equity, alternative asset management and financial services corporation based in the United States with $376 billion of assets under management. It specializes in private equity, real assets, and pri ...
,
Kohlberg Kravis Roberts KKR & Co. Inc., also known as Kohlberg Kravis Roberts & Co., is an American global investment company that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate, credit, and, through its strat ...
, Goldman Sachs Principal Investment Group,
The Blackstone Group Blackstone Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate bu ...
,
Bain Capital Bain Capital is an American private investment firm based in Boston. It specializes in private equity, venture capital, credit, public equity, impact investing, life sciences, and real estate. Bain Capital invests across a range of industry ...
and
TPG Capital TPG Inc., previously known as Texas Pacific Group and TPG Capital, is an American investment company based in Fort Worth, Texas. The private equity firm is focused on leveraged buyouts and growth capital. TPG manages investment funds in grow ...
. These firms are typically direct investors in companies rather than investors in the private equity asset class and for the most part the largest private equity investment firms focused primarily on
leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...
s rather than
venture capital Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which h ...
.
Preqin Preqin is a privately held London-based investment data company that provides financial data and insight on the alternative assets market, as well as tools to support investment in alternatives. By the company's own definition, its data encomp ...
ltd (formerly known as Private Equity Intelligence), an independent data provider, provides a ranking of the 25 largest private equity investment managers. Among the largest firms in that ranking were AlpInvest Partners, Ardian (formerly AXA Private Equity), AIG Investments, Goldman Sachs Private Equity Group, and Pantheon Ventures. Because private equity firms are continuously in the process of raising, investing, and distributing their private equity funds, capital raised can often be the easiest to measure. Other metrics can include the total value of companies purchased by a firm or an estimate of the size of a firm's active portfolio plus capital available for new investments. As with any list that focuses on size, the list does not provide any indication as to relative investment performance of these funds or managers.


See also

*
History of private equity and venture capital The history of private equity and venture capital and the development of these asset classes has occurred through a series of boom-and-bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub- ...
*
Leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...
*
List of private-equity firms Below is a list of notable private-equity firms. Largest private-equity firms by PE capital raised Each year Private Equity International publishes the PEI 300, a ranking of the largest private-equity firms by how much capital they have raised for ...
* Management buyout * Private-equity fund


References


External links


Private equity – a guide for pension fund trustees
Pensions Investment Research Consultants (PIRC) for the Trades Union Congress. *Krüger Andersen, Thomas.
Legal Structure of Private Equity Funds
Private Equity and Hedge Funds 2007. *Prowse, Stephen D
The Economics of the Private Equity Market
Federal Reserve Bank of Dallas, 1998. {{DEFAULTSORT:Private Equity Firm Alternative investment management companies