Understanding Private Equity
Private equity is a critical part of the financial landscape, driving growth and innovation in businesses worldwide. In this overview, we aim to demystify private equity, and private equity investing, explaining what it is, how it works, and why it matters.
What is Private Equity?
Private equity (PE) describes investments that represent an equity interest in a privately held company. Any business that is not a public company (i.e. not listed on a stock exchange) is part of the vast private company universe, which covers 98% of businesses worldwide, compared with just 2% that are listed companies. A private equity investment is made by investors who directly invest in private companies. By investing, institutional and retail investors provide capital that can be utilised to fund new technology, make acquisitions, expand working capital, and bolster and solidify a company's balance sheet; all with the intent to increase the company’s value. Investors often also provide their business expertise to the company, improving aspects of the company's operation to gain efficiencies, enter new markets and boost sales.
How Does Private Equity Work?
Private equity firms raise funds from institutional and individual investors. These funds are used to acquire stakes in companies, sometimes taking full ownership. The private equity firm works to improve the company's efficiency leading to increased profitability, with the goal of selling the company in the future (typically within 5-7 years) at a significant profit.
What are the Advantages of Investing in Private Equity?
Private equity has the potential to generate high returns, diversification, and the opportunity to invest in companies and sectors not available through public markets. Another advantage is the managing firm is able to execute a multi-year strategic plan without concern for quarterly earnings compared to public markets. However, it's important to note that private equity investments also carry significant risks and are not suitable for all investors.
How Does Private Equity Create Value?
Private equity creates value in several ways. This includes operational improvements, strategic direction, financial restructuring, and governance changes. By implementing these changes, a private equity firm aims to make the company more efficient, profitable, and valuable.
What are the Three Main Strategies for Private Equity Investments?
The three main strategies for private equity investments are buyouts , growth capital, and venture capital. In a traditional buyout, a majority stake of a company is bought. Growth capital is minority investment in relatively mature companies that are looking for capital to expand or restructure operations. Venture capital is financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential.
What is a Private Equity Fund?
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships that have a fixed term of 5 -10 years (with annual extensions).
How are Private Equity Funds Managed?
Private equity funds are managed by private equity firms that often play a hands-on role in the operations of the companies in which they invest. They actively work to add value to these companies, aiming to increase their profitability and efficiency, which in turn benefits the fund's investors.
What is the Difference Between a Private Equity Fund and a Hedge Fund?
While both private equity funds and hedge funds are types of investment vehicles, they differ in their investment strategies, time horizons, and regulatory environments. Private equity funds typically invest in private companies and have a long-term investment horizon. On the other hand, hedge funds invest in a diverse range of public and private securities and derivatives, and they often employ more complex strategies including leverage, short-selling, and arbitrage.
What is the Difference Between a Private Equity Fund and listed Managed Fund?
A listed managed fund is a type of pooled vehicle that is typically open-ended and invests the fund's capital in a variety of different listed and publicly traded assets according to a specific investment strategy. On the other hand, a private equity fund is a type of pooled vehicle that specifically invests in private equity—securities of companies not listed on a public exchange. It is typically closed ended or less liquid.
What is the Difference Between Private Equity and Venture Capital?
Private equity and venture capital are both parts of the private market landscape, but they target different types of companies and use different investment strategies. Private equity is often associated with the buyouts of mature companies and improving their value, while venture capital is typically used to invest in young, riskier, high-growth companies.
How is Private Equity Regulated?
Private equity is subject to regulation by financial authorities in each jurisdiction where it operates. In many countries, private equity firms are required to register with the relevant regulator and comply with various reporting and conduct requirements.
What is the History of Private Equity Investment?
The origins of private equity date back to the 19th century, with wealthy individuals and families investing in private companies. The modern private equity industry began to take shape in the late 1970s and early 1980s with the formation of venture capital and leveraged buyout firms. Over the decades, private equity has grown significantly, becoming a major part of the global financial system.
What are the Recent Trends in Private Equity?
Recent trends in private equity include a growing focus on sustainable and responsible investing. There is also an increasing interest in the technology and healthcare sectors, due to their high growth potential. Furthermore, we're seeing a trend of larger, more diversified private equity firms that are able to offer a wider range of investment products and services.
Private equity at Schroders
At the core of our private assets business sits our private equities specialism. It has been built out from the acquisition, in 2017, of Swiss headquartered Adveq, a leader in private equity investing. Adveq was established in 1997 and as such has a 25+ year track record in private equity investing.
Schroders currently manages AUD$141.4 billion in private assets, including AUD$27.5 billion[1] in private equity managed by Schroders Capital’s Private Equity team. The experienced and stable team of over 60 investment and risk management professionals is led by Rainer Ender – Global Head of Private Equity – a 20+-year veteran of private equity investing.
The team provides global market coverage with local, on-the-ground presence, working to find opportunities, long-term trends and themes to complement traditional equity and bond portfolios. They have a solid track record of absolute and relative performance across investments, strategies and vintages.
Learn more about the Schroder Specialist Private Equity Fund.
[1] AuM includes non-fee earning dry powder, includes Greencoat AuM as of December2023 (acquisition completed 11 April 2022)
eBook: Private Equity Essentials
In this eBook, we set out the key information about private equity investing, accompanied by a case study.
Watch our video series
In our 'Understanding Private Equity' video series, Claire Smith and Eric Greer from Schroders Australia's private equity team explore the following topics.
- Video: What is private equity?
- Video: Where does private equity fit in the investment universe?
- Video: Why should investors consider an allocation to private equity?
- Video: Why does Schroders choose to target small and mid-cap companies?
- Video: What are private equity co-investments?
- Video: What are primaries?
- Video: What are secondaries?
- Video: A current investment in the Schroders Specialist Private Equity Fund with exciting growth prospects.
Private Equity Quiz
Now that you have learned more about Private Equity, take our quiz and test your knowledge.
Q: What is the primary characteristic of a private equity investment?
A: Investment in a privately held company, either directly or via a fund.
Q: In which decade did the modern private equity industry begin to take its current shape?
A: The 1970s
Q: What are the three main strategies for private equity investments?
A: Buyouts, growth capital, and venture capital.
Q: How do private equity firms typically aim to increase the value of the companies they invest in?
A: Through operational improvements, strategic direction, financial restructuring, and governance changes.
Q: What is one significant difference between a private equity fund and a hedge fund?
A: Private equity funds typically target long-term investments in private companies.
The information contained in this material is general information only and does not take into account your objectives, financial situation or needs. Before acting on the information contained in this material you should consider the appropriateness of the information in regard to your objective, financial situation and needs before making any decision about whether to invest, or to continue to hold an investment.
The repayment of capital and performance of an investment is not guaranteed by Schroders or any other party. Opinions constitute our judgement at the time of issue and are subject to change. Past performance is not an indicator of future performance. Investment guidelines represented are internal only and are subject to change without notice. Schroders may record and monitor telephone calls for security, training and compliance purposes.