The huge sums that private equity firms make on their investments evoke admiration and envy. Typically, these returns are attributed to the firms’ aggressive use of debt, concentration on cash flow and margins, freedom from public company regulations, and hefty incentives for operating managers. But the fundamental reason for private equity’s success is the strategy of buying to sell—one rarely employed by public companies, which, in pursuit of synergies, usually buy to keep.
The chief advantage of buying to sell is simple but often overlooked, explain Barber and Goold, directors of the Ashridge Strategic Management Centre. Private equity’s sweet spot is acquisitions that have been undermanaged or undervalued, where there’s a onetime opportunity to increase a business’s value. Once that gain has been realized, private equity firms sell for a maximum return. A corporate acquirer, in contrast, will dilute its return by hanging on to the business after the growth in value tapers off.
Public companies that compete in this space can offer investors better returns than private equity firms do. (After all, a public company wouldn’t deduct the 30% that funds take out of gross profits.) Corporations have two options: (1) to copy private equity’s model, as investment companies Wendel and Eurazeo have done with dramatic success, or (2) to take a flexible approach, holding businesses for as long as they can add value as owners. The latter would give companies an advantage over funds, which must liquidate within a preset time—potentially leaving money on the table.
Both options present public companies with challenges, including U.S. capital-gains taxes and a dearth of investment management skills. But the greatest barrier may be public companies’ aversion to exiting a healthy business and their inability to see it the way private equity firms do—as the culmination of a successful transformation, not a strategic error.
FAQs
Private equity firms commonly deploy various strategic approaches to achieve their investment objectives. These strategies encompass A) leverage buyouts, B) growth capital investments, C) venture capital initiatives, D) secondaries, and E) fund of funds structures.
Why are people in private equity so rich? ›
Private equity owners make money by buying companies they think have value and can be improved. They improve the company or break it up and sell its parts, which can generate even more profits.
Why is private equity so hard to get into? ›
Landing a career in private equity is very difficult because there are few jobs on the market in this profession and so it can be very competitive. Coming into private equity with no experience is impossible, so finding an internship or having previous experience in a related field is highly recommended.
Is BlackRock a private equity firm? ›
BlackRock's Private Equity teams manage USD$41.9 billion in capital commitments across direct, primary, secondary and co-investments.
What is the 2 20 rule in private equity? ›
This is also known as the “2 and 20” fee structure and it's a common fee arrangement in private equity funds. It means that the GP's management fee is 2% of the investment and the incentive fee is 20% of the profits. Both components of the GPs fees are clearly detailed in the partnership's investment agreement.
What is the main goal of private equity? ›
The overall goal of a private equity fund is almost always to realise appreciation in the pool of private assets acquired within a time frame of generally 10-12 years. Fund strategies and the type of assets held will vary in accordance with the fund's stated objectives.
How much does the average person in private equity make? ›
Private Equity Salary, Bonus, and Carried Interest Levels: The Full Guide
| Position Title | Typical Age Range | Base Salary + Bonus (USD) |
|---|
| Associate | 24-28 | $150-$300K |
| Senior Associate | 26-32 | $250-$400K |
| Vice President (VP) | 30-35 | $350-$500K |
| Director or Principal | 33-39 | $500-$800K |
2 more rowsPrivate equity funds are illiquid and are risky because of their high use of debt; furthermore, once investors have turned their money over to the fund, they have no say in how it's managed. In compensation for these terms, investors should expect a high rate of return.
How rich do you have to be to invest in private equity? ›
The minimum investment in private equity funds is typically $25 million, although it sometimes can be as low as $250,000. Investors should plan to hold their private equity investment for at least 10 years.
What is the most prestigious private equity firm? ›
Which private equity firms are publicly traded? The four largest publicly traded private equity firms are Apollo Global Management (APO), The Blackstone Group (BX), The Carlyle Group (CG), and KKR & Co.
Who is bigger, Blackstone or BlackRock? ›
While Blackstone's AUM is substantial, it is smaller than BlackRock's, with around $800 billion in assets under management. In summary, BlackRock is larger in terms of assets under management compared to Blackstone.
What are the methods of private equity? ›
Private Equity Deal Types
The buyout remains a staple of private equity deals, involving the acquisition of an entire company, whether public, closely held or privately owned. Private equity investors acquiring an underperforming public company will often seek to cut costs, and may restructure its operations.
What are the strategies of private equity real estate? ›
Within private equity real estate, assets are typically grouped into four primary strategy categories based on investment strategy and perceived risk. Those four categories are core, core-plus, value-added and opportunistic. The key differentiator between these categories is the risk and return profile.
What are private market strategies? ›
Investment strategies in private markets vary significantly — from higher-risk, high-reward assets like venture capital to potentially more stable, but lower-return options like infrastructure. Each strategy suits different investor goals and risk appetites. It's not about which is best but which best fits your needs.
Which of the following is most likely a private equity strategy? ›
Answer C) leveraged buyout. Explanation C is correct. A type of private equity fund that invests in established profitable and cash generative companies with solid customer bases, proven products, and high quality management is most likely described as a leveraged buyout.
