Private equity transactions take place when private equity firms make investments in target companies. A typical target company is likely to be an enterprise that has potential for growth in the short or medium term. The private equity firm will normally acquire a controlling shareholding in the target company and take on a relatively large amount of debt in financing the transaction. The intention of the private equity firm is often to work with the management of the target company to achieve growth by streamlining operations and generating profits through increased efficiency. The private equity firm might, however, bring in a new management team to push through changes and make the target company more profitable. The profits are used to grow the business and service the debt.
Generally, private equity transactions are not long-term investments. The private equity firm is normally looking for short- to medium-term growth in the value of the target company with a view to exiting the investment in the medium term. The target company typically is sold or perhaps floated on a stock exchange after about three years. The length of time that a target company is held before the sale of the investment depends on how well the company performs, the availability of suitable buyers and the general economic climate. It is not uncommon for private equity sales to involve the acquisition of the shares by another private equity investor.
A private equity firm generally comprises a number of investors who pool their funds to invest in specific types of growth companies. The participants might be wealthy individuals or institutional investors such as pension funds. There are often a number of partnerships under the umbrella of a particular private equity firm, and one or more of these partnerships is involved in each private equity transaction. By pooling their funds in this way, the investors expand the scope of target investments and increase the possibilities for a high return from the private equity transactions. Typically, investments are made by a partnership in a number of target companies in the same economic sector, such as healthcare, to increase the firm’s experience of investing in the industry.
The number and value of private equity transactions taking place at any time varies greatly, according to the general economic climate. During a downturn, private equity firms might take a greater equity participation in the target company and take on less debt. A return to economic growth and more access to bank financing would normally signal an increase in the number and amount of private equity transactions.