Inside Private Equity: How Firms Buy, transform, and sell companies

Private equity, also known as PE, is a potent area in finance currently. While many individuals might believe that the headlines of finance only happen on Wall Street, some of the most significant transformations actually occur off of Wall Street, in private equity firms. Private equity firms focus on buying companies, restructuring them, and then selling them in the hope of a return on the investment.

Step 1: Buying a Company

Private equity firms begin by raising money from various investors, including large university endowments, pension funds, high-net-worth individuals, sovereign wealth funds, and even retirement funds. Once the funds are raised, they are combined with borrowed money, also known as a leveraged buyout (LBO), to purchase the companies. Typically, private equity firms target businesses that have potential but may require modernization, additional resources, or are underperforming, offering the opportunity for expansion. 

Step 2: Transforming the Business 

In contrast to stock investors who wait after purchasing shares, private equity firms are actively involved in the companies they invest in. Their main goal is to make the company more profitable and overall stronger. Private equity firms might cut inefficiencies to save money, change leadership to create more profits, expand the business by breaking into new markets or releasing products, and even modernize companies from their supply change to even digital services. The overall goal is to turn an average business that has potential into a thriving company with significant profits.

Step 3: Selling for Profit

Private equity firms tend to hold onto companies for three to seven years before “exiting”. The “exit” can happen in many ways, such as taking the company public through an initial public offering (IPO), selling to a bigger company in the same industry, or even selling the company to another private equity firm. The end goal is for investors to see big returns on their initial investment into an “average” company that is now thriving.

Overall private equity strives to find potential where it may be overlooked, take risks in order to transform these companies into successful returns for investors.