Private equity is a form of financing that all too often is avoided. The concept is intimidating to many entrepreneurs and small-business owners, but ultimately it entails individuals or firms who invest capital into a company in return for a percentage of the business’ profits. As a viable option, it warrants consideration, but the first step is getting prepared.
Here, Gabriel Patterson of Winnipeg,a masterful investment banker who has become an expert in securities, real estate, offshore tax planning and Islamic finance, takes a look at the first steps a company needs—learning the lingo, maximizing valuation, etc.—to consider before dipping its toe into the private equity pool.
What is Private Equity?
Private equity is quite simply understood to be ownership of an entity or interest in an entity that is not publicly listed or traded. Most firms and individuals that participate in private equity financing have a lot of capital to support their endeavors into financing these entities. The end goal of these private equity firms is to achieve a positive return on the original investment; however, the typical timeframe for a return on investment can be anywhere from four to seven years.
Deal Origination and Portfolio Oversight:
Private equity firms are involved with both deal origination as well as portfolio oversight. Deal origination or deal sourcing is the process whereby firms identify investment opportunities. This consists of the creation and maintenance of a strategic relationship with mergers and acquisitions, investment banks and other sources to secure deal flow.
“Deal flow is essentially the rate at which investors receive investment offers. Portfolio oversight is also known as portfolio management, and it involves the act of overseeing the investments that were made as a part of deal origination,” stated Gabriel Patterson.
Private Equity Investment Strategies:
When going into the actual business of investing, there are several strategies an investor may take. Among the most popular are leveraged buyouts (LBO), real estate, growth capital, and venture capital. Leveraged buyouts are considered the hallmark of private equity investment strategies—they involve the ability of a private equity firm to purchase companies by only putting up a fraction of the purchase price. Venture capital, on the other hand, is another highly popular strategy which takes into account the relative age of the company to be purchased (the younger, the better) and invests capital in the fledgling company to return profits upon catered maturation of the company. In the context of real estate, private equity investments include the “value-added” investment properties.
Investing in Private Equity:
Many investors and firms in private equity financing are considered “whales,” putting a considerable amount of capital into their investments. However, there are options for people to invest even when it is not a large sum of money. Private equity investment firms give investors a chance to participate in the financing of private equity and see the slow churning of their returns as well.
As a long-term investment strategy, private fund financing is indeed quite lucrative, just give it a few years to sit and collect a nice return.
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