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Private equity works by raising money from institutional investors, using that money (plus a lot of borrowed debt) to buy mature private companies, improving those companies over 4-7 years, and then selling them for a higher price. The detailed mechanics involve fund structures, capital calls, portfolio operating plans, leveraged
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Private equity is one of the most misunderstood industries in finance. Ask ten people what it is and you will get ten different answers: "the guys who bought Toys R Us", "the investors who own my dentist now", "some kind of hedge fund", "
Operating Partners
A private equity operating partner is a senior professional at a PE firm whose role is to work directly with portfolio company management on operational improvement, rather than sourcing new deals. Where investment partners focus on buying and selling companies, operating partners focus on what happens during the hold period:
Value Creation
Private equity value creation is the set of operational changes a PE firm makes to a portfolio company during the hold period to increase its value. In theory, these changes include improving pricing, reducing costs, growing revenue, upgrading management, executing tuck-in acquisitions, expanding geographies, and implementing technology. In practice,
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A private equity portfolio company is simply a company that is owned by a PE fund. When a PE firm buys a company, that company becomes part of the firm's "portfolio" for the duration of the hold period, usually 4-7 years. During that time, the
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A dividend recapitalisation, usually shortened to "dividend recap," is when a private equity firm has its portfolio company take on new debt, and uses the cash from that debt to pay the PE firm a dividend. The company is still owned by the PE firm afterwards. The company
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PIK stands for payment-in-kind. It is a type of debt where, instead of paying interest in cash, the borrower adds the interest onto the outstanding loan balance. The loan gets bigger each period, but no cash leaves the company. The lender earns interest that compounds on itself and
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A sale-leaseback is when a company sells a building or a piece of real estate it owns, and then immediately signs a long-term lease to keep occupying that same building. The company walks out of the transaction with cash in the bank from the sale, and a monthly
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An LBO model, short for leveraged buyout model, is the spreadsheet a private equity firm builds to decide whether to buy a company and what to pay for it. At its core, it projects a target company's future cash flows, layers on a proposed capital structure (equity from
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Private equity compensation has four layers: base salary, annual cash bonus, long-term incentive (carry or phantom carry), and co-investment opportunity. Base and bonus are paid in cash each year and are roughly comparable to investment banking at the junior levels. The real money in private equity is carry,
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Private equity and venture capital are both investment models where professional managers raise money from institutions to buy stakes in private companies. That is where the similarity ends. Private equity firms buy mature, cash-flowing companies, usually a controlling stake, and use debt to amplify returns. Venture capital firms buy
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Private equity is a way of owning companies privately, meaning not on the stock market, and trying to make them more valuable before selling them on. A private equity firm raises money from large investors (pension funds, endowments, insurance companies, wealthy families), pools that money into a fund, and uses