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What is Private Equity? | Wall Street Simplified
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Suggest questionThe book that changed my life:
If you have any questions, DM me on IG: Twitter: https:/If you have any questions, DM me on IG: Twitter: Also, connect with me on LinkedIn: Email me at: camerongalbraith@
In this video, I break down the foundations of private equity!
Check out the BEST GMAT prep course here:
Tags: Private Equity, What is private equity?, What do private equity firms do?, how do private equity firms work?, pe firms, private equity firms, what is the point of private equity, pe exit, private equity exit strategies, top private equity firms, NYC private equity, pe foundations, private equity foundations, private equity structure,
Script:
What is Private Equity?
So as the name suggests, PE is the ownership or interest in an entity that is not publicly listed or traded. PE investments come from firms that purchase stakes in private companies or alternatively acquire control of public companies with the intention of taking them private and ultimately delist them from stock exchanges aka a “go-private.”
Like any investment, PE is used to buy companies with the hope that the company’s value will increase over time. But unlike a hedge fund or an asset management firm, PE firms often play a much more active role in increasing their portfolio company’s value.
Similar to HFs, a PE firm’s partners raise funds from investors like wealthy individuals and institutional investors with the goal of generating a positive return not available elsewhere. The time horizon of these funds and investments is typically between 4 to 7 years.
Because the nature of PE is finding diamonds in the rough and boosting their value, firms spend a lot of time searching for acquisition targets. But unlike the public markets, once a target is identified, the firms still have to actually convince the current owners to sell, which is often easier said than done. During this search process, firms leverage a lot of metrics and tools, like the current executive team, the industry, revenue forecasts, and of course, plenty of valuation models.
But, once the due diligence is complete and a company is acquired by a PE firm the second function can begin.
Portfolio oversight and management is the process of strengthening the business. This is done in numerous ways, but can most succinctly be phrased as “increasing operational efficiencies.” This typically means reducing overhead by laying off employees that aren’t providing sufficient value to the company. A good example of this is JAB Holdings, a European investment firm, famously creating successful subscriptions for two of their portfolio companies, Pret and Panera. This has boosted profits for both firms and is something I discuss at length in another video on my channel.
But sometimes a company doesn’t need an entire overhaul. Oftentimes a change in IT, accounting or branding can boost the value of a company.
What is important to know is that PE investors aim to find ways for the businesses to improve ebitda, or earnings before interest, tax, depreciation, and amort. This is the golden metric.
The purchase of a company is financed through debt, which is collateralized by the company’s operations and assets. As the “leveraged” in LBO suggests, PE firms are able to assume ctrl of a co while only putting up a fraction of the purchase price in cash upfront. Then the debt is paid off by the cash flows of the business, which if a PE firm does what it’s supposed to do, should more than cover this expense. Now this should allow you to see how PE can become very profitable when done correctly, especially in a time of low interest rates. Because a PE firm is able to use leverage to buy a company, they are only spending a fraction of the purchase price for a business. Then if a firm can successfully optimize efficiencies and increase profit margins, they can rake in millions off the differential between the interest costs and the cash flow of the improved business. This is then what makes a PE portfolio company ripe for an exit.
A typical exit for a middle market company is to be sold to a large corporation in their vertical or oftentimes an adjacent industry. This purchase price paid by the large company should have a substantially higher valuation than the PE firm bought the company at, allowing them to sell all of their equity in the business and cash out.
Alternatively, some investors might ride their portfolio companies all the way to an IPO. Allowing investors to ultimately sell their shares in the public market.
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About Cameron Galbraith
The book that changed my life: https://amzn.to/3ZvZyyF
If you have any questions, DM me on IG: https://www.instagram.com/galbra1th/ Twitter: https:/If you have any questions, DM me on IG: https://www.instagram.com/galbra1th/ Twitter: https://twitter.com/Galbra1th Also, connect with me on LinkedIn: https://www.linkedin.com/in/cameronjgalbraith/ Email me at: camerongalbraith@me.com
In this video, I break down the foundations of private equity!
Check out the BEST GMAT prep course here: https://gmat.targettestprep.com/plans?referral_code=ODI2MzM%3D
Tags: Private Equity, What is private equity?, What do private equity firms do?, how do private equity firms work?, pe firms, private equity firms, what is the point of private equity, pe exit, private equity exit strategies, top private equity firms, NYC private equity, pe foundations, private equity foundations, private equity structure,
Script:
What is Private Equity?
So as the name suggests, PE is the ownership or interest in an entity that is not publicly listed or traded. PE investments come from firms that purchase stakes in private companies or alternatively acquire control of public companies with the intention of taking them private and ultimately delist them from stock exchanges aka a “go-private.”
Like any investment, PE is used to buy companies with the hope that the company’s value will increase over time. But unlike a hedge fund or an asset management firm, PE firms often play a much more active role in increasing their portfolio company’s value.
Similar to HFs, a PE firm’s partners raise funds from investors like wealthy individuals and institutional investors with the goal of generating a positive return not available elsewhere. The time horizon of these funds and investments is typically between 4 to 7 years.
Because the nature of PE is finding diamonds in the rough and boosting their value, firms spend a lot of time searching for acquisition targets. But unlike the public markets, once a target is identified, the firms still have to actually convince the current owners to sell, which is often easier said than done. During this search process, firms leverage a lot of metrics and tools, like the current executive team, the industry, revenue forecasts, and of course, plenty of valuation models.
But, once the due diligence is complete and a company is acquired by a PE firm the second function can begin.
Portfolio oversight and management is the process of strengthening the business. This is done in numerous ways, but can most succinctly be phrased as “increasing operational efficiencies.” This typically means reducing overhead by laying off employees that aren’t providing sufficient value to the company. A good example of this is JAB Holdings, a European investment firm, famously creating successful subscriptions for two of their portfolio companies, Pret and Panera. This has boosted profits for both firms and is something I discuss at length in another video on my channel.
But sometimes a company doesn’t need an entire overhaul. Oftentimes a change in IT, accounting or branding can boost the value of a company.
What is important to know is that PE investors aim to find ways for the businesses to improve ebitda, or earnings before interest, tax, depreciation, and amort. This is the golden metric.
The purchase of a company is financed through debt, which is collateralized by the company’s operations and assets. As the “leveraged” in LBO suggests, PE firms are able to assume ctrl of a co while only putting up a fraction of the purchase price in cash upfront. Then the debt is paid off by the cash flows of the business, which if a PE firm does what it’s supposed to do, should more than cover this expense. Now this should allow you to see how PE can become very profitable when done correctly, especially in a time of low interest rates. Because a PE firm is able to use leverage to buy a company, they are only spending a fraction of the purchase price for a business. Then if a firm can successfully optimize efficiencies and increase profit margins, they can rake in millions off the differential between the interest costs and the cash flow of the improved business. This is then what makes a PE portfolio company ripe for an exit.
A typical exit for a middle market company is to be sold to a large corporation in their vertical or oftentimes an adjacent industry. This purchase price paid by the large company should have a substantially higher valuation than the PE firm bought the company at, allowing them to sell all of their equity in the business and cash out.
Alternatively, some investors might ride their portfolio companies all the way to an IPO. Allowing investors to ultimately sell their shares in the public market.