How Do Private Equity Funds Work?

Private Equity

Private Equity

Private Equity is funds that are invested into companies that are unlisted. A private equity fund is used by investors and a firm to purchase a company; either private or public. The company generally has great growth potential and sometimes they are either under-performing or undervalued. The private equity firm will invest in the company using many different sources such as time, talent, energy as well as capital to help improve the performance and prospects of the company. They will invest in the company for a few years typically somewhere around 4 or 5 years, but occasionally up to 6 or 7 years. After it has invested and improved the company they will sell the company. Private equity is considered a short term investment in a company that is already established. Of course the hope for this type of investment is that the company is sold for a substantial capital gain. Effi Enterprises is one such company which offers private equity to companies which are in the high tech field or in the medical market. This type of private investing of time, capital and other resources is beneficial for businesses which are in trouble and need help to maintain for a while until a real profit is realized. The main goal of private equity investing is to increase the value of the company so that investors do not suffer loss but end up with a substantial capital gain instead.

Who Can Get Private Equity?

On one hand the answer to this question is any company that is established and has a solid business plan with goals for growth can obtain private equity funding. But it is really a lot more complex. Every fund has its own sectors. In each sector are identifiable areas of growth or very specific expertise. These segments are considered carefully as the ones which can perform well in the market over the short term are the ones which are set apart as having the most potential. Companies such as Effi Enterprises will look at the different sectors separately and try to determine which ones will grow at a faster rate than others. The ones that have the most potential for the quickest growth are identified for investment possibilities.

How does Private Equity work?

It is certainly not a quick process to obtain private equity funding. It can take 6 months, a year or even longer to get it all established. Sign off on this type of deal is done in two stages. The first one is the term sheet phase has to do with the investor which has to outline their specific interests for investing in this particular company and draw up the final contracts. Basically a term sheet begins with an evaluation of the business. It is a rather informal evaluation that would last about 4 weeks. Then the term sheet is issued which lists the intent to invest and lines out all the particular terms. Then comes the confirmation. This entire process can take about 4 or 5 months; it depends on how much needs to be verified.

Obtaining Results

Private Equity funds are a way of raising capital for a company; but it is not a quick fix. Before the business can go public or seek a buyout there is much work to be done. Each Private Equity team will have its own idea of how it is all going to work together. But the main goal is to sell the company through some means in the end. Usually this will be an IPO or buyout.  Investment firms will take their own unique approach to achieving these end results. Many will take a hands-on up close and personal way to help and others will be less involved but supportive. The end goal is for everyone to make a profit.

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About Efraim Landa

My name is Efraim Landa I am an entrepreneur and an expert in venture capital. I am the co founder of Effi Enterprises, a venture capital firm as well as the co founder and CEO of Gluco Vista, a company that is in the process of developing a non invasive glucose meter for those with diabetes.

Posted on July 20, 2012, in Finance, private equity, Private Equity Financing, VC financing and tagged , , , . Bookmark the permalink. 1 Comment.

  1. A great description of private equity funds, as well as how Effi Enterprises fits into the equation. Very informative

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