Private Equity –
what is it?

Key facts at a glance:

• Private equity refers to equity investments in companies that are not listed on a stock exchange.

• Investments are usually made by private equity firms that specialise in certain industries, regions, or company stages.

• Private equity firms participate in a company's profits and influence its development. In return, they typically provide not only capital but also business expertise.

What Is Private Equity?

Private equity is investment capital that is not traded on the stock exchange. So-called private equity firms (PEFs) acquire shares in a company for a limited period. The capital for this comes partly from private but mainly from institutional investors, and is raised by the private equity firms through private equity funds.

When a PEF invests in a start-up, this is referred to as "venture capital". Such investments promise high returns but always carry significant risk, making them a particular venture.

However, private equity does not only provide companies with fresh capital: the firms typically use their influence as shareholders to participate in profits and shape the company's development.

What Forms of Private Equity Are There?

For the various stages of a company's lifecycle, there are private equity firms with different specialisations. These range from the aforementioned venture capital for start-ups, to growth promotion for young companies, to accompanying acquisitions or successions. There are even specialised private equity firms for restructuring situations.

In addition to the distinction by company stage, private equity can also be categorised by other criteria. Some firms focus their activities on certain regions. Others specifically support selected industries. A focus on certain investment sizes is also not uncommon. Overall, private equity is a broad and highly differentiated financing sector.

Who Benefits from Private Equity?

Private equity firms usually prefer companies with a favourable risk-return profile. They typically invest with a high proportion of debt capital to achieve even higher returns from their investments. In addition, they participate in the expected profits. The private and institutional investors benefit from the PEF's expertise in investing in companies that promise lucrative returns in the long term.

The companies themselves, in turn, benefit from the funds provided, which are usually precisely tailored to the respective company stage and financial challenge.

Furthermore, private equity firms invest time and business expertise in the respective company. With their partner networks, they develop operational strategies, expansion plans, and process optimisations. As a result, companies can often develop beyond purely financial support.

The downside is that the influence of existing shareholders is reduced and profits must be shared with an additional party. However, if an effective workflow is found, the private equity firm and the company can benefit from each other over an investment period of up to ten years.