Private Equity
Players & basic structure
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Limited Partners (LPs): investors who provide most of the money (pension funds, endowments, wealthy individuals, family offices).
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General Partner (GP) / PE firm: manages the fund, finds deals, operates the business and exits the investment.
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Portfolio company: the business the fund acquires.
Fundraising
Limited Partners (LPs): investors who provide most of the money (pension funds, endowments, wealthy individuals, family offices).
General Partner (GP) / PE firm: manages the fund, finds deals, operates the business and exits the investment.
Portfolio company: the business the fund acquires.
Sourcing deals
PE teams use networks, bankers, brokers, and proprietary outreach to source acquisition targets.
They screen many opportunities and shortlist the most promising.
Initial screening & valuation
Quick checks: market size, profitability, management quality, competitive position.
Initial valuation range is estimated (multiples of EBITDA, discounted cash flows, etc.).
Due diligence (deep dive)
Financial, legal, commercial, tax, operational due diligence.
Validate historical earnings, forecast cash flows, identify liabilities, and estimate synergies or turnaround work needed.
Often involve external consultants and lawyers
Deal structuring & financing
PE deals often use a mix of equity (from the fund) and debt (bank loans / bonds) — this is leveraged buyout (LBO) financing.
Structure includes purchase price, debt terms, any seller financing, management roll-over equity, and covenants.
GP negotiates representations, warranties, indemnities and closing conditions.
Closing the deal (acquisition)
Legal documents signed, money transferred, control changes hands.
The new ownership may install a new board, bring in new management, or keep the existing team.
Value creation (the “active” part)
- PE firms actively work to increase the company’s value over the holding period (typically 3–7 years). Methods include:
Operational improvements (cost cuts, process optimization, pricing).
Strategic initiatives (new product launches, market expansion, M&A add-ons).
Financial engineering (optimizing capital structure, replacing expensive capital).
Replacing/upgrading management and governance.
The aim is to grow earnings (EBITDA) and improve margins so the company can be sold at a higher multiple and higher absolute profit.
Monitoring & reporting
Regular board meetings, KPIs tracking, quarterly reporting to LPs.
The GP manages risk, debt covenants, and execution of value-creation plans.
Exit (harvest)
Common exit routes:
Sale to a strategic buyer (a company in the same industry).
Sale to another PE firm (secondary buyout).
Initial Public Offering (IPO) — listing the company on a stock exchange.
Recapitalization — take some cash off the table while retaining a stake.
Goal: generate returns above the original investment after paying off debt and transaction costs.
Returns & fees
Typical GP economics: management fee (often ~1.5–2% of committed capital per year) + carried interest (a share of profits, commonly ~20% above a hurdle rate).
LPs receive distributions (capital + profits) after GP’s carry and fees.
Performance is commonly measured by IRR (internal rate of return) and MOIC (multiple on invested capital).
Types of private equity strategies (brief)
Buyouts / LBOs: control acquisition of established companies using leverage.
Growth equity: minority or majority investments in growing companies that need capital to scale (less or no leverage).
Venture / early-stage: high-risk investments in startups (some funds separate VC from PE).
Distressed / turnaround: buy troubled companies, restructure, and revive them.
Sector- or geography-focused funds.