Private equity is a broadly used term which groups funds and investment companies that provide capital on a negotiated basis generally to private businesses. This category of firms is a superset that includes venture capital, buyout-also called leveraged buyout (LBO)-and mezzanine and expansion funds. The industry expertise, amount invested, transaction structure preference, and return expectations vary according to the mission of each.

Private equity firms act as the intermediary between institutional investors and the entrepreneurial and portfolio companies. In addition, there are publicly traded investment companies that play the same role between public investors and the same issuer market. Their investments are sometimes augmented by angel and corporate investors. Issuers include the following types of companies:

• New ventures (early and later stage).
• Middle-market private companies:
  • Expansion.
  • Change in capital structure (recapitalization).
  • Change in ownership.
• Public companies:
  • Going private.
  • Leveraged buyouts.
  • Financial distress.
  • Special situations.
  • Private investment in public equities (PIPE).

The types of firms and the types of investments they make are not clearly delineated. Some venture funds invest in the same rounds of financing alongside buyout funds that provide expansion and growth capital. It seems a bit confusing because the terms in the private equity business are not used consistently among firms. Some firms will only take a controlling interest while others will make minority investments. The actual deal structure varies greatly based on the experience and preferences of the general partners of each of these types of firms.

In some instances, private equity firms take a controlling interest in the target investment, with minority stakes left to management and prior company stockholders, some of whom may have been involved in creating the company or developing the company to the stage where the acquisition or investment became attractive.

In other situations the private equity firms leverage their buyouts by pooling bank and other financial institution debt in a financial package that could include convertible subordinate debt and tranches of unsecured financing.

Some private equity firms deal only in a specific business field where they have a strong expertise, while others seek opportunities in diverse industries.

Many private equity firms have staffs with strong management skills, although they seldom take a day-to-day operating role in the firms they acquire or in which they invest. Their staffs are accustomed to consulting and guiding company executives in how to achieve growth and profitability that will increase firm value during the holding period.

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