Infographic: How does private equity work?
10 March 2023 | Investments | Equities | 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?
- Through transforming an investment:
- Improvement of operational efficiency.
- Guide on succession in the family business.
- Institutionalise processes.
- 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:
- Invest directly
- 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)
