Private Equity

The term private equity is used to distinguish an investment in a privately held company from an investment in publicly traded stock. Private equity investment refers to different strategies for investing in privately run companies, or strategies for turning a public company private. There is an industry built around private equity investing, because of the profit and the lack of public scrutiny involved.

One of the most common types of private equity investing is the leveraged buyout. Here, private equity firms assume debt so they can raise the capital needed in order to buy a publicly owned company; then they take it off of the market. The debt that the private equity firm assumed is repaid with interest from the earnings of the newly-private company. In some cases, multiple private equity firms will pitch in to take over the debt.

The majority of private equity deals don't involve the takeover of controlling interest in the target company. With venture capital is a type of private equity where investors put up their money to start up a company. Most biotechnology and tech firms fall under this heading; investment in the earliest stages of a new company like this is costly, so venture capital is only used when a less-expensive financing option is not available.

Sometimes, even established companies need a cash infusion in order to make administrative changes or to buy what they need. Here, private equity is called growth capital. Growth capital can come from more than one source, and it is best for profitable companies that don't have the working capital to do what they want to do.

Most of the goings on in private equity are secret. Government rules and securities laws usually do not apply, and the day-to-day operations of the companies are usually kept out of the public eye. Investors in private equity firms enjoy advantages that public investors do not, such as lower accountability and higher profits.