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What is private equity?
Private equity (PE) is the capital that investors raise to invest in companies that are not publicly listed or traded, or buying a controlling interest in a publicly traded company. Usually, PE investments are made into established businesses in exchange for equity or ownership of the company with the anticipation of gaining a positive return on investment (ROI).
Private equity can come from high-net-worth individuals (HNWI), pension funds, and PE firms, to name a few. Private equity firms will invest in businesses with the intention of increasing its value over time and then selling the company for profit. Private equity firms will use capital raised by limited partners (LPs) to take 50% or more in ownership of a company when invested. Any one PE investment in a company is considered part of that PE firm’s portfolio. A PE firm will have multiple companies it has invested private equity in.
How does private equity work?
Private equity investors will create a private equity fund by raising capital from multiple limited partners (LPs) (usually considered a PE firm). Once the fund has reached the set goal of capital required to invest in a company, the fund will close so that no other investors can contribute to the fund. Private equity investors will then use the PE fund to purchase the majority of a company for a controlling stake. Once purchased, that company is part of the PE firm’s portfolio and is now considered a portfolio company. With this controlling stake in the portfolio company, a PE firm will work to improve profitability for the company. Since the PE firm owns majority of the portfolio company, when it decides to sell the company, it will usually make a profit and distribute returns to the LPs that invested in the initial private equity fund.
Why do I need legal guidance on private equity?
Legal experience and expertise are necessary when it comes to completing PE deals. Private equity lawyers assist individuals and PE firms in negotiating the terms when buying or investing in businesses as well as advise on taxes and disclosure when selling a company. Experienced attorneys who have an expertise in mergers and acquisitions, finance, tax law, commercial business, and competition law, will be advantageous in a PE deal.