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Infographic: How does private equity work?

10 March 2023 Philip Robotham, Head of Intermediary at Schroders, South Africa

Private equity (PE) firms buy unlisted companies with the aim to increase their value.  After a few years, they will sell them, creating a profit for investors.

How do investors generate value?

  1. Through transforming an investment:
  • Improvement of operational efficiency.
  • Guide on succession in the family business.
  • Institutionalise processes. 
  1. Through growing an investment: 
  • Acquisitions.
  • Increase scale.
  • New products and services.
  • Geographic expansion. 

What are the key types of strategies?

  • Buyout: A change in the ownership of an established company.
  • Turnaround: Investing in companies that have run into operating difficulties.
  • Venture: Funding start-ups or early-stage companies that are at the beginning stages of their journey.
  • Growth: Investing in established companies that require high levels of capital. 

How to invest in private equity?

  • Private Equity firms or general partners will set up a PE fund and raise money from limited partners.
  • Limited partners or investors invest in the company in exchange for shares. This can be done through an Asset Manager, Pension Fund, etc.
  • Two ways of doing so:
    1. Invest directly
    2. Co-invest directly alongside the General Partner 

Why it’s easier to access data today?

Individual investors now have more options to invest in private equity with the help of skilled specialists

  • Introduction of new fund structure (e.g. ELTIF/LTAF)
  • Lower minimum threshold
  • Regulated framework
  • Technology developments (e.g. new platforms, automated client registration, digital reporting)

 

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