By Edward Rayner and Josh Coley
What is Private Equity?
Private Equity (PE) describes firms that buy and manage private companies before selling them, usually through Private Equity funds on behalf of institutional and high net-worth investors. In contrast with typical public fund managers, Private Equity firms do not hold stakes in companies listed on securities exchanges. Private Equity funds, as opposed to public funds like ETFs, also only exist for a finite term (usually between 7-10 years), after which the funds’ holdings are liquidated, often through IPOs, and profits distributed. Private Equity funds also typically focus on investing in mature companies, as opposed to venture capital firms which focus on startups.
How do Private Equity deals work?
On the buy side, Private Equity deals are usually done through buyouts, whereby the fund buys an entire company and makes it private if it was previously publicly owned. The nature of these large-stake deals makes PE firms often heavily involved in the management and operations of the companies they invest in, a significant difference to public fund managers, as they themselves look to improve the firm’s cost efficiency and often engage in restructuring. Conversely, large-stake Private Equity buyouts can also be advantageous for the acquired company, as they can make operational and financial changes without having to worry about share market expectations about their earnings every quarter, often allowing them to adopt a longer term strategy outlook.
Another buy side PE transaction is the carve-out, whereby the fund buys a particular division or subsidiary of a large, usually listed, company. These deals are often done where the fund is buying a business complementary to another of its large-stake holdings and is hoping to merge the two companies, in the hopes of synergy and economy of scale advantages. PE firms thereby often specialize in particular sectors and industries, due to the very hands-on nature of the funds in managing their holdings’ operations and strategy. On the sell side, most deals are done through IPOs, whereby the fund sells the company through a public listing.
How is Private Equity different from Investment Banking?
While both Investment Banks and Private Equity firms engage in M&A deals and help companies raise capital, investment banks tend to operate more as a middle-man on the sell side, facilitating the sale of shares to new investors often through an IPO. PE firms, however, operate more heavily on the buy-side, and, as opposed to investment banks, invest in companies with their own funds which they manage on behalf of investors. Therefore, while investment banks tend to act more as facilitators helping to transfer ownership in a deal, PE firms act as one of the parties in the transaction, by investing in companies through the funds they manage. This means that Private Equity firms are usually more heavily involved in the management and strategy of the companies they engage with, as they may have a controlling interest in them, rather than just being a 3rd party to their capital raising.
Why are Private Equity Jobs So Sought-After?
Amongst many people working in finance-related jobs, namely Investment Banking, Private Equity is seen as one of the most prestigious exit opportunities for those at the Senior Analyst-Associate level and have been working at an Investment Bank for 3-5 years. The main reason for this is the sheer difficulty and aptitude required to land one of these jobs, with very little jobs on the market and the average candidate being a seasoned Investment Banker who has progressed through the Internship and Junior Analyst stages of recruitment.
Another appealing aspect of Private Equity is the nature of the job and what it entails. As stated before, PE funds work more on the buy-side of deals and thus, are more heavily-involved in the day-to-day operations and management of the companies they own/invest in. This appeals to Investment Bankers in particular as by going into PE, they are no longer the so-called ‘middle-men’ of business transactions and thus, can employ both management/strategic skills in addition to the financial modelling and financial advisory of their Investment Banking roles. As a result, Private Equity is seen by many ambitious graduates in the Financial Sector as the next step beyond their Investment Banking/MBB consulting internships and graduate roles.
The Dark Side of Private Equity
As Private Equity firms are often the owners/major investors of the companies they engage with, their actions can have a direct effect upon a company’s employees. In most cases, a PE firm’s operations within a company involve the reallocation of resources and/or restructuring of the entire company itself, resulting in significant job cuts with the aim of saving money and sometimes leaving entire divisions of a company unemployed.
Subsequently, the ethics of Private Equity firms are often called into question as the sole intention of their operations/strategy for a company is to make money, potentially sacrificing people’s jobs and said company’s long-term wellbeing in the process and providing no real benefit to society.
Like our article on Investment Banking, we aimed to give a summary of the Private Equity industry, highlighting both its upsides and its possible downsides. We believe it is important for those with an interest in their field to gather research from a range of sources, both for an against the industry, before making a decision.
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