Learn How Private Equity Firms Create Value
This is a sponsored post to help people with making money with private equity firms from our friends at Messina Group, because nothing excites me more than learning about money.
What are private equity firms?
Because private equity is a very complex and intricate field, we will first give a tour of what private equity (PE) firms are and do. Also known as a private equity fund, a PE firm will invest in or buy companies. This is their main and only goal. Of course, there are some purposes behind this action and they are all monetary. Because after buying a company, the PE firm will invest time in adding value to it and then reselling. You can find a more extensive definition of equity firms in this article: https://www.dummies.com/business/corporate-finance/mergers-and-acquisitions/ma-investors-private-equity-pe-firms/.
A private equity firm’s journey is complex
If you want to understand how an equity firm gets to create value, you must understand its structure and stages of action. So, first, you have the general partners, also known as GPs. They are the main decision factors, the ones who make the choices of whether or not to invest in certain companies. Nonetheless, they are not the ones who come up with the money to invest, as they only steer the business.
The ones who invest or come with the money are called Limited Partners – they also go by the abbreviation LPs. Some LPs examples would be university endowments, public pensions or wealthy families. What GPs do is they raise funds from LPs and invest in a chosen company. Investing in a company or even buying one will be done by them as a minority stakeholder. If the GPs manage to raise more money from the LPs than intended, that will be known as an oversubscribed action.
The journey of a private equity firm is long and this is why investing in such a business requires strength and patience. The first stage is the investment period. Let’s say that the GPs of a PE firm choose to invest in 5 different companies in 5 years. These companies will automatically become part of their portfolio.
The next stage is called the investment period and encompasses private equity deals. This is when the investing and buying of companies takes place. The stage usually lasts for 4 to 6 years. The PE firm will go and invest hoping to gain profit at the beginning of the cycle.
At the next phase, the PE firms start selling the acquired companies to, let’s say, bigger companies. It’s time they gained their money back.
Now it’s time for profit sharing. You should know that LPs get all the invested money back. In terms of profit sharing or carried interest, the GPs get 20% of the profit generated from a fund and the remaining 80% goes back to the LPs depending on how much they invested. You get to learn more about an equity firm on this website.
Here are some value creation strategies
To be able to resell the companies they bought, the equity firms will have to invest time to create value. Only in this way, they will be able to get the companies back on the market and sell them at a profitable price.
There are some strategies that equity firms use to create value. Among them, we remember geographic deployment, which implies that a company initially present in a single country is now available in more other countries. Another means of creating value is by product repositioning. This method is represented by the process of the total transformation of a product. The product will be brought from an outdated state to a states-of-the-art, trending position, which will immediately help increase sales.
Buildup strategies are defined by purchasing a solid company and buying smaller competing firms. After integrating them, this process will lead to creating a market leader. In this way, the initial company will have grown substantially, just like its price.
Private equity is an offering field for those who understand its games. Succeeding in this business requires specific knowledge and devotion. Investing in private equity firms will not become profitable in a few days, it will take years to gain money, but if you are good at buying companies and understand the tricks of the trade, it is worth it. This is a growing industry and a real opportunity for those who want to gain money in time.