The stock market moves sideways and job growth is uncertain, but private equity groups just chalked up another in a string of banner years.
Private equity firms, which profit from buying, improving, and reselling companies, aren’t as well known as other parts of the financial world. But from their beginnings in the leveraged buyout deals of the 1980s to 2005’s record numbers, private equity groups have become a major factor in the thriving mergers and acquisitions market.
Private Equity ABCs
Private equity groups make money by purchasing companies and adding value to them in a variety of ways. Those might include improving a firm’s balance sheet, says Dennis Monroe, chairman of Bloomington-based Krass Monroe, P.A., a law firm that works in mergers and acquisitions.
“Most private equity groups are experts at adjusting a balance sheet,” Monroe says. “They have access to funds that the operator would not.” That lets them pay off debt and provide the capital for company growth. A private equity group might also adjust an acquisition’s management or business strategy, or buy multiple companies in an industry and merge them to create a larger, more competitive single firm.
The equity group then resells the improved company, ideally at a profit. It looks for buyers among other firms in an industry—called strategic buyers—and other private equity firms, known as financial buyers. An initial public offering is another, less commonly used exit strategy.
A private equity firm typically raises investor money in pools, called funds, once the firm’s principals decide how much money they can invest to best effect. The private equity firm specifies for investors the time it will take—perhaps five to ten years—to buy companies, improve and sell them, and return principal and profit to fund investors. A private equity firm might fill multiple funds over the course of many years in business.
