Private equity explained with examples and ways to invest

How to get into PE

Private equity has some of the lowest ratios of hires to applicants in the financial services industry. It is not uncommon to have 250+ applicants applying to a single role. And many of these applicants are already analysts or associates at bulge bracket investment banks, hedge funds, asset management firms or even consulting firms.

I am not trying to discourage potential applicants but rather drive home the point that private equity is not an entry level role but rather something that bankers aspire to because of the better quality of work and potentially higher compensation at the senior levels. Treat it as a promotion that you should aspire towards.

A private equity CV must focus on three main parts:

5.1. Deals and Experience

The most important section of your CV is going to list out the very best deals that you have successfully executed in any capacity during your career. The objective here is twofold. Firstly, you must demonstrate your experience and the fact that you have the necessary skills to hit the ground running. Secondly, you want to steer the interview towards a discussion about these deals which is something you probably can talk about and discuss at length.

In case the role for a specific sector like TMT or FIG etc., you should tailor your CV for those industries. Private equity firms usually love big brand names so keep that in mind and make sure those brands pop out. Don’t forget to include any internships with big-name banks.

5.2. Academics

If you only have a few years of experience while you are applying to a private equity role, then your academics will still be considered relevant. Your goal here is to demonstrate that you are not only an overachiever but also a consistent performer. These words might seem like generic fluff to the uninitiated, but consistent performance is a very key attribute that the recruiters would be looking for. Being brilliant some of the time is usually not enough at this level. You have to demonstrate that you have consistently hit the mark throughout your life.

If you had any significant scholarships or any investment club membership, then it might help to include those details. PE firms prefer candidates from Ivy League or Oxbridge and equivalent but that alone is not enough and should instead be considered as a minimum requirement.

Some PE specific courses and certifications can also help you build up your skillet and get some CV boosts. Here are the best ones:

5.3. Core Skills and “Fit”

When it comes to core skills, modelling (including LBOs), finance and accounting know-how, business acumen, presence of mind, etc. will be relevant. There are plenty of online courses which can teach you some of these skills, but only to supplement your on-the-job experience.

Another important aspect in private equity is the cultural fit. While cultural fitment is important for any role, it becomes an especially important consideration in private equity. The reason for this is that private equity professionals tend to stick around for a very long while given how the compensation is linked to the long-term performance of their investments. Private equity setups are usually much smaller than even a modest sized banking set up and therefore cultural compatibility is taken rather seriously.

If you need help with your CV for Private Equity, here are some resources to help you out:

Ключевые различия между частным капиталом и венчурным капиталом

Основные различия между частным капиталом и венчурным капиталом указаны ниже:

Инвестиции, сделанные инвесторами в частные компании, известны как Private Equity. Венчурный капитал, с другой стороны, относится к вкладу капитала, внесенному инвесторами с высоким риском и потенциальным доходом.
Частные инвестиции, инвестиции осуществляются на более поздней стадии или стадии расширения, тогда как в венчурном капитале инвестиции осуществляются на ранней стадии, т.е. на начальном этапе или на стадии запуска.
Фирмы Private Equity инвестируют только в несколько компаний, а фирмы Venture Capital инвестируют в большое количество компаний.
Фонды Private Equity предоставляются зрелым компаниям, имеющим хорошую репутацию. И наоборот, фонды венчурного капитала предоставляли малый бизнес, но не имеют желаемого послужного списка.
Частные инвестиции могут быть сделаны в любой отрасли. В отличие от венчурного капитала, в который вкладываются средства в такие отрасли с высоким потенциалом роста, как энергосбережение, биомедицина, повышение качества, информационные технологии и так далее.
Профиль риска в венчурном капитале сравнительно выше, чем в частном капитале.
В частном акционерном капитале средства используются для финансовой или операционной реструктуризации компании Vendee. С другой стороны, венчурные фонды используются для оптимизации бизнес-операций путем разработки и запуска новых продуктов или услуг на рынке.
В целом, частные инвестиционные компании имеют 100% -ную долю участия в инвестируемой компании, но доля венчурной компании в инвестируемой компании составляет не более 49%.

Private Equity versus Publicly Traded Stocks

An investor can buy ownership stakes in private businesses by investing in private equity through a manager or can purchase ownership stakes in public companies by investing through individual stocks, mutual funds, and ETFs.

Similarities between Investing in Private Equity and Public Stocks

Generally, businesses are pro-cyclical. Thus, as the economy grows, the profitability of a business grows as well. This factor affects both private and public equity ownership stakes.
Most industries that private equity firms buy (such as industrial companies, technology enterprises, or consumer-oriented businesses) have public-equity counterparts.
Large PE firms may take public companies private or seek to exit their investment by selling their stakes through an initial public offering (IPO).

Differences between Investing in Private Equity and Public Stocks

Private equity firms buy controlling stakes in the businesses they invest in, often paying a premium to acquire this control.
A controlling stake enables owners and managers to have closer alignment, which may not exist in publicly traded companies.
The management itself often selects the board of directors in a publicly-traded company, leading to poor oversight.
PE firms do not have to report quarterly financial results to the public. Less frequent reporting allows companies to have a longer-term focus when making decisions.
Private equity investments aggressively use leverage because the risk tolerance of the investor base is high. On the other hand, publicly traded companies operate with less debt, as investors are typically more averse to risk.
Investments held in PE-backed businesses are more illiquid than publicly traded stocks, which are exchangeable for cash during market hours. By comparison, the liquidity for a private entity only happens when the entire business is sold, with a typical 5-year holding period.

Now that we’ve learned why it’s worth investing in private equity let’s dive into the areas private equity funds can excel in, creating superior value and differentiating themselves.

Какие доходы учитываются при расчете малообеспеченных семей

При расчете малообеспеченных семей учитывается не только их общий доход, но и его состав. Анализ материального достатка семьи может проводиться по разным причинам, и компьютер учитывает все эти аспекты.

При расчете среднего дохода семьи учитывается как средний доход семьи на одного человека, так и рассчитанный годовой прожиточный минимум

При оценке малообеспеченных семей важно определить, какое имущество включается в их доход и в какой степени оно влияет на его стоимость

Согласно нормативным документам, к малообеспеченным семьям относятся те, чей доход не превышает установленных законодательством пределов. При этом рассчитывается средний доход на одного человека, а не общий доход семьи. Если семья не имеет дохода или имеет очень низкий доход (S O-CALLED ‘zero income’), то такая семья может быть признана малообеспеченной.

Элемент.	Описание.
Доход на душу населения.	Учитывает величину дохода, деленную на количество членов семьи.
Заработная плата.	Определяется в соответствии с установленными правилами и стандартами.
Имущество.	Влияние имущества, в том числе недвижимости, автотранспорта и других активов, анализируется с точки зрения среднедушевого дохода семьи.

Таким образом, при расчете малообеспеченных семей учитывается не только размер дохода, но и его состав, а также наличие и стоимость имущества. Все эти факторы позволяют определить степень бедности семьи и определить степень ее социальной поддержки.

What are Private Equity Funds?

Private equity funds are pools of capital to be invested in companies that represent an opportunity for a high rate of return. They come with a fixed investment horizon, typically ranging from four to seven years, at which point the PE firm hopes to profitably exit the investment. Exit strategies include IPOs and sale of the business to another private equity firm or strategic buyer.

Institutional funds and accredited investors usually make up the primary sources of private equity funds, as they can provide substantial capital for extended periods of time. A team of investment professionals from a particular PE firm raises and manages the funds.

Equity

Equity can be further subdivided into four components: shareholder loans, preferred shares, CCPPO shares, and ordinary shares.

Typically, the equity proportion accounts for 30% to 40% of funding in a buyout. Private equity firms tend to invest in the equity stake with an exit plan of 4 to 7 years. Sources of equity funding include management, private equity funds, subordinated debt holders, and investment banks. In most cases, the equity fraction is comprised of a combination of all these sources.

Types of Private Equity Funds

Private equity funds generally fall into two categories: Venture Capital and Buyout or Leveraged Buyout.

1. Venture Capital (VC)

Venture capital funds are pools of capital that typically invest in small, early stage and emerging businesses that are expected to have high growth potential but have limited access to other forms of capital. From the point of view of small start-ups with ambitious value propositions and innovations, VC funds are an essential source to raise capital as they lack access to large amounts of debt. From the point of view of an investor, although venture capital funds carry risks from investing in unconfirmed emerging businesses, they can generate extraordinary returns.

2. Buyout or Leveraged Buyout (LBO)

Contrary to VC funds, leveraged buyout funds invest in more mature businesses, usually taking a controlling interest. LBO funds use extensive amounts of leverage to enhance the rate of return. Buyout finds tend to be significantly larger in size than VC funds.

Exit Considerations

There are multiple factors in play that affect the exit strategy of a private equity fund. Here are some necessary questions to ask:

When does the exit need to take place? What is the investment horizon?
Is the management team amenable and ready for an exit?
What exit routes are available?
Is the existing capital structure of the business appropriate?
Is the business strategy appropriate?
Who are the potential acquirers and buyers? Is it another private equity firm or a strategic buyer?
What Internal Rate of Return (IRR) will be achieved?

Typical Exit Routes for PE Funds

When deciding to exit, PE firms take either one of two paths: total exit or partial exit. In terms of a wholesale exit from the business, there can be a trade sale to another buyer, LBO by another private equity firm, or a share repurchase.

In terms of a partial exit, there could be a private placement, where another investor purchases a piece of the business. Another possibility is corporate restructuring, where external investors get involved and increase their position in the business by partially acquiring the private equity firm’s stake. Finally, corporate venturing could happen, in which the management increases its ownership in the business.

Lastly, a flotation or an IPO is a hybrid strategy of both total and partial exit, which involves the company being listed on a public stock exchange. Typically, only a fraction of a company is sold in an IPO, ranging from 25% to 50% of the business. When the company is listed and traded publicly, private equity firms exit the company by slowly unwinding their remaining ownership stake in the business.

Additional Resources

Thank you for reading CFI’s guide on Private Equity Funds. To keep learning and advancing your career, the following resources will be helpful:

Equity Capital Market (ECM) Guide
Career Guide to Private Equity
Revenue-Based Financing
Search Fund
See all wealth management resources
See all capital markets resources

What are examples of private equity?

The Blackstone Group was the largest private equity firm in 2019, with $82.85 billion in funding. Here’s the complete list for the Top-20 (figures are in $ billions):

The Blackstone Group: $82.85
The Carlyle Group: $63.80
KKR & Co.: $47.98
CVC Capital Partners: $47.41
Warburg Pincus: $36.56
Bain Capital: $35.55
EQT Infrastructure: $30.05
Thoma Bravo: $29.88
Apollo Global Management: $29.00
Neuberger Berman: $28.88
Hellman & Friedman: $26.90
TPG Capital: $25.66
EnCap Investments: $21.10
Vista Equity Partners: $19.79
Apax Partners: $18.62
General Atlantic: $16.92
Clayton, Dubilier & Rice: $16.51
Permira: $16.39
Advent International: $16.03
Silver Lake: $15.00

Влияние дохода на размер ипотеки.

Получаемый доход может влиять на размер кредитной суммы, вероятность ее одобрения, процентную ставку и вообще на возможность принятия заявки в банк. Клиентов с маленьким официальным доходом сейчас банки даже и не рассматривают, хотя в их числе бывают состоятельные люди, которые по каким-то причинам скрывают официальный доход, получая «серую зарплату», например, чтобы не платить налогов. Поэтому средний офисный работник с средней зарплатой для банка будет предпочтительнее, чем состоятельный бизнесмен с низким официальным доходом.

Банк может отказать клиенту в ипотеке, если его денежные поступления не будут соответствовать требованиям по финансовому обеспечению займа. В качестве дохода кредитор рассматривает:

Суммы, указанные в справке 2НДФЛ. Именно они являются официальными и с них уплачивается налог. По статистике за последний год можно сделать вывод о возможной платежеспособности клиента и предварительно рассчитать сумму кредита.
Доход по справке по форме банка. Некоторые банки принимают подобные справки в свободной форме наряду с официальными, поскольку иногда работник может получать з/п «в конверте», что не указывается в 2НДФЛ. Однако, крупные банки, такие как ВТБ, Сбербанк, уже перестают рассматривать заемщиков с подобными справками, поскольку именно среди таких возникает бОльшее количество неплательщиков.
Пенсии. Поскольку на момент выплаты займа клиент должен оставаться все еще в трудоспособном возрасте, то официальным пенсионерам, которые вышли на отдых и не планируют больше работать, ипотека не светит. А вот пенсионеры, которые вышли по заслуге лет или на льготную пенсию (военные) вполне могут указать пенсию, как официальный стабильный источник дохода.

Стоит отметить, что алименты, стипендии, пособия в расчетах никак не будут участвовать, поскольку считаются нестабильными источниками дохода. Вы сами можете подать заявку на ипотеку и банк автоматически посчитает максимальный размер ипотеки и предложит лучшие условия:

Заявка на дешевую ипотеку

Сумма ипотеки до 100 млн. рублей
Срок до 25 лет
Ставка от 11.2% годовых
Первый взнос от 15%
Ипотека молодым семьям и под материнский капитал
Быстрое рассмотрение заявки и получение решения
Профессиональный подход, помощь в оформлении документов
Минимум волокиты и походов в банк

Examples of private equity deals

There is an extraordinary number of private equity deals being closed on a daily basis, particularly when deals in venture capital, growth capital, distressed assets, and the rest are taken into account.

For this reason, we decided it would be worthwhile to look at examples of two different kinds of private equity deals — a leveraged buyout and a venture capital deal — to understand the dynamics of private equity from a couple of different standpoints.

The leveraged buyout example: Blackstone acquires Hilton Hotels for $26 billion, 2007

If anyone ever doubted the blurred lines between M&A and private equity, it is worth noting that Blackstone started life as an M&A advisory firm in 1985, using its advisory fees to move into private equity.

In 2007, Blackstone used a leveraged buyout to purchase Hilton Hotels. Blackstone leveraged almost 80% of the total amount, ($20 billion), to take control of the famous hotel chain. It reduced operational inefficiencies at Hilton, sold underperforming assets, and reinvested in good locations.

When it sold the asset in 2018, it did so at a profit of around $14 billion. And all by initially just using $5.6 billion of its own equity.

Venture capital example: SoftBank acquires 34% Alibaba for $20 million, 2000

In the venture capital branch of private equity, investors are looking for young, sometimes non-profitable companies with massive potential.

The acquisitions are almost never for anything other than a share of the company, on the basis that the equity investment in those fast-growing companies will lead to holding a share in a much larger, profitable company a few years down the road.

That was the bet that Softbank took with a young Chinese e-commerce store called Alibaba in 2000. When Alibaba listed launched its IPO nearly twenty years later, it achieved a valuation of $231 billion — making Softbank’s share worth a cool $60 billion.

CVC’s ESG boost of a Polish convenience store chain

More recently, many fund managers started to consider sustainability factors as a potent driver of oversized returns. A premium on active ESG value creation is cited as the top driver of ESG initiatives in private equity. ¹² These initiatives may include energy-efficient improvements, better supply chain management, strengthening occupational health and safety, improving decision-making or engaging with the workforce for talent retention.

In 2017 British private equity fund CVC acquired Żabka, Poland’s largest convenience store chain. Before the CVC’s investment, the company “had a high franchisee churn rate, which was disruptive to the business and had a negative impact on customer satisfaction”. ¹³ When the fund acquired the retailer, Żabka had around 4,500 stores, managed by 3,000 franchisees.

CVC identified a number of ESG-related efficiencies and savings. For example, to replace refrigerants in 2,200 stores, reduce the plastic packaging of some products and increase sales of plant-based foods. By slashing the packaging weight for one of the chain’s sandwich brands alone, they eliminated three tons of plastic waste. Żabka became the first retailer in Poland to use 100 percent recycled plastic bottles in its branded beverages. They also launched a broad program to reduce CO2 by at least 5 percent per year and reach net zero by 2050. More recently, Żabka unveiled its first all-green energy store in Warsaw, which includes a kinetic floor, converting footsteps into energy, photovoltaics and the use of quantum dots technology to obtain solar energy through the windows. ¹⁴

For its sustainability efforts, the Polish Private Equity & Venture Capital Association awarded Żabka as the ‘Green Portfolio Company of the Year’ in 2020. More importantly, CVC’s support “significantly reduced” Żabka’s franchisee churn rate and improved customer satisfaction. The retailer recorded a 20 percent increase in aggregate sales growth over the last three years and improved employee engagement. Żabka currently manages 7,000 stores and 6,000 franchises. In the period between 2017 and 2020, gross margins increased by 3.9 percentage points. ¹⁵ The commitment to sustainability also helps recruitment efforts and has become an attractive proposition to retain key talent.

The majority of executives and investment professionals today agree that ESG programs create value

How private equity deals are funded

Private equity deals can be funded by almost every conceivable combination of private capital. As mentioned at the outset, the ultimate source of the funds could be anything from a university endowment fund to a rich aunt with an appetite for high returns on her investment.

Ultimately, all of this cash makes its way into the private equity fund, which is then used to pay for the investments. A key point to note here is that the limited partners — the endowment fund, the rich aunt, and others — hand control of the investments over to the general partners, the private equity manager.

Thus, his or her reputation depends on how well they manage the funds invested.

Advantages of Private Equity

From a business perspective:

Private equity offers companies at every level an alternative way to raise capital without going through the bank loan process or needing to place their companies up for public offer on the stock market.
This structure often allows businesses to focus less on quarterly performance and more on the overall growth and big picture.

From the perspective of investors:

Private equity funds offer an opportunity to achieve high returns due to the incentives coming from all sides.
There are usually financing and tax advantages.
There is freedom from certain restrictions that come with trading on the public market.

Private equity follows three stages: Acquire, Grow and Exit

Private Equity Process: Aquire

Deal identification

Right investment focus / thesis
Market assessment
Identify potential targets

Deal evaluation

Formulate value creation thesis
Submit / Sign Non-Binding Offer
Plan / Organize Due Diligence

Deal execution

Due Diligence
Prepare business case
Deal structuring
Define financing structure
SPA & Deal signing / closing

Private Equity Process: Grow

Deal implementation

Confirmatory analysis with top executives of the acquired company
Business strategy
Retain and attract top talent
Complementary acquisitions (if required)

Value creation

Operational improvement program
Deliver sustainable improvements
Measure bottom-line results
Risk management

Private Equity Process: Exit

Maximize deal returns

Prepare of sale with short & long investment teaser
Search for potential buyers
Management presentations
Sell process and deal execution

Private Equity Career Path and Progression

Private equity is usually considered a destination rather than a starting point by most banking professionals. Therefore, exit options are available but usually not availed. If you do want to move, you would have the option of choosing from many banking roles at senior levels and even roles in large corporates, if that is what you desire.

However, a great many private equity analysts and associates decide to stick around in order to benefit from the carry. Things begin to really look up as you move from associate to AD and director level positions. Not only is your fixed compensation increasing, but you also become eligible for the carry and begin to really see some serious returns.

In terms of job responsibilities, things tend to become more strategic as you rise through the ranks. You will focus more on managing the fund which includes strategic decision-making, deal negotiation, investor relations and fundraising.

What Is Private Equity?

Private equity (PE) refers to a constellation of investment funds that invest in or acquire private companies that are not listed on a public stock exchange. So-called PE funds may also buy out public companies, take them private, and then restructure them for potential future growth.

Another way to define private equity is as a form of financing where public or private companies accept investments from a PE fund. Typically, private equity invests in mature businesses in more conventional industries in exchange for an equity stake in the company.

In the past, private equity funds haven’t always been regulated in the same way as other market participants. These days, however, they tend to be scrutinized more rigorously.

How Private Equity Works?

Private equity operates on the basic strategy of ‘buy-sell’. Over the years investors realized that compared to traditional investment methods that are dependent on fluctuations in the market, irrespective of the business potential, quick profits could be made by investing in private businesses over a short period. Private equity firms gauge business proposals and choose the one with the highest profit potential.

IPOcombining business investment portfolio management

Deal origination – Not all business proposals promise profit. To identify the right profit potential in a merger and acquisition (M&A) is what determines the success of a private equity firm. It is now a common practice for PE firms to hire a talented team specializing in sourcing profitable deals. Since M&A markets are highly competitive, to enter the game early, before a business goes into auction, gives a competitive edge to the PE firm.
Due diligence – When buyers and sellers mutually agree on a proposal, the next step is to verify all documents for authenticity. Private equity firms engage a whole team of consultants ranging from bankers, accountants, lawyers, market researchers, and financial analysts to assess, evaluate, and verify the acquiring company.
Management – Once the private equity firm is onboard, apart from actively participating in the key decision-making processes, they take on a larger role of mentoring the management for best practices in strategic planning and financial management. Also, since the management’s compensation packages include equity components as well, their contribution to the business directly ties with the profit margins. This keeps the management motivated to deliver their best. Investors gain from this integrated approach and together they take the business to new heights.
Exit – The exit point of a private equity firm is usually set in the initial stages while deciding the investment horizon. It is typically between 2 to 7 years max. Though the time is set closer to the exit, several considerations are accounted for – such as the exit routes, preparedness of the management, potential buyers, etc. There are three types of exit strategies:
- Wholesale exit – This involves selling the whole business to another buyer, leverage buyout by another private equity firm, or repurchase of the investor shares.
- Partial exit – This involves inviting another private investor to buy a portion of the shares, or a management restructuring where external investors buy a considerable portion of shares.
- Floatation or an IPO – This exit strategy is a hybrid of the previous two. Usually, only a fraction of the business is sold in an IPO. When a maximum of 50% of the business is listed on the open stock exchange, private equity firms gradually start wrapping their operations and exit the firm.

Private Equity Job Description

Private equity analysts and associates spend the majority of the time looking at prospective investment targets or portfolio companies. Rather than looking at what the top brass does, lets stick to what you would be expected to do in your first few years:

3.1. Screening

Reviewing and screening potential investment targets is the first part of the job. Analysts and associates look at the financials of a company, its management structure and strength, business opportunities, growth potential, market dynamics, competitive landscape and other such factors which are likely to impact a company’s future prospects.

Even though analysts and associates do most of the grunt work, they are not the ones making the actual decisions. In fact, given the sizeable investment for each of these deals, decisions are taken at the very top level. Analysts and associates mostly just assist the decision-makers with whatever number crunching or other assistance that is needed.

What makes this PE analysis different from what an investment banking or equity research analyst does is that the PE firm’s investment is likely to change the business strategy and capital structure of the target firm as they will become a majority shareholder.

3.2. Execution

Once the investment committee has decided to go ahead with an investment opportunity, associates help with the execution of the transaction. This means performing thorough due diligence including looking at key personnel or even suppliers etc. Associates also assist in deal structuring and finalizing the terms of the investment.

Executing a PE transaction requires liaising with dozens of external experts including auditors, lawyers, industry experts, sponsors, investment banks, consultants and so on.

3.3. Monitoring

The third component of your job as a PE associate is monitoring and managing the investment portfolio companies of the firm. This may include things like quarterly valuations, monitoring material developments in the industry or portfolio companies, preparing detailed analysis for management, seeking out M&A, divestitures or other opportunities, recommending corporate actions to the management of the portfolio companies and so on.

As should be evident, the work involved is significantly more strategic than what an equity research analyst would look at. This is because PE firms usually have enough leverage to determine the direction that the portfolio companies should take.

The general management work also involves the creation and updating of marketing materials like memorandums, investor presentations, fact sheets etc.