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To understand what aprivate equityfirm is, it is important to understand what the different parts of the term mean. Equity is the value of an asset minus any associatedliability. Private equity is the equity in an asset that isnt freely tradeable on the publicstock market. A private equity firm, then, is the controlling partner in a collection of partnerships that have come together to pool their capital and invest in a particular opportunity.
While such firms may focus on a variety of investment strategies, including drumming upventure capital, they often buy undervalued or under-appreciated companies, improve them, and then sell them for a profit, sort of like house flipping but in a commercial setting. After buying a company, a private equity firm will remove it from the stock market. This allows the firm to make tough or controversial decisions without having to answer to or release sensitive information to shareholders or the public generally. By making the company private, the firm is basically only accountable to its smaller group of investors.
In order to turn the company around, a private equity firm will often replace or control the management team of the company. It isnt unusual, however, for the equity firm to keep existing employees. While the firm is controlling the company, its goal is usually to determine how it can improve the companys performance or projected future performance so that potential investors will buy the company at a profit.
Privateequity fundingcan come from a variety of sources. Most often, the funds come from pension funds, financial institutions, or individual investors with a substantial net worth. By being able to pool such large amounts of investment capital, the firm expands its reach to, and power over, potential investment opportunities.
Once the work of improving the company has been done and its value increased, sometimes in as little as three years, the private equity firm takes the company public again. If it all works out, the firm sells the company for a nice profit for all original investors. The firm itself, also called thegeneral partnerof the partnership of investors, also often draws additional fees, including management and performance fees, for the legwork involved in the endeavor, including advertising, accounting, and the like.
Very good explanation of a Private Equity Firm.
pension funds have a lot of money to manage and get good returns on. a pension fund will have people whos job it is to look for investment opportunities to invest, say $1M and over a year or two, turn that into $1.1M or $1.5M.
one of the investment vehicles a pension fund may consider is to work closely with a private equity fund, and put some of the pensions money into the investment pool that the private equity firm is getting together to buy, for example, a baseball stadium, or a public company. Pension funds essentially are looking for a lot of different ways to manage their assets (that is, make money) and private equity will be just *one* of the dozens of ways they do that.
How can funds for private equity come from pension funds? Please explain!
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