Investing 101: The ins and outs of private equity

Julie Brownlee, Fsp Invest, 15 Aug. 2014

Tags: private equity, what is private equity, alexander forbes, private equity companies, what private equity companies do, investment companies,

When you’ve read the financial news, no doubt you’ve come across the term ‘private equity’ before.

So what is private equity? What makes it different to equity on the stock market?

Let’s take a closer look…

What is private equity?

Last month, pension company Alexander Forbes made a return to the Johannesburg Stock Exchange after a seven-year absence. The company delisted in 2007 after a private equity consortium bought the company.

So what makes private equity different from ‘normal’ buyouts on the stock market?

Well private equity is capital that doesn’t have a listing on a public stock exchange. Instead private companies hold the capital.

A private equity company is an investment company. What makes it different from an investment company on the stock market is it gets its funds from institutional investors, like pension funds or wealthy individuals. An investment company on the stock market would raise money on the stock market instead.

What private equity companies do

Private equity companies tend to focus on companies that aren’t performing well. A private equity company buys one such company and either delists it (removes it from the stock market) or buys a majority stake in the company. This gives the private equity company control over the company.

Private equity firms have the available cash and expertise to turn troubled companies around. But in some cases, they load these companies up with debt, remove the cash from the business and then try to sell them.

When private equity companies want to buy a large company, they may team up with other private equity firms, as was the case with Alexander Forbes.

They make their money from the company’s profits. Or by selling the company on once they’ve made it a viable business again and it relists on the stock market.

Going back to the Alexander Forbes example, the private equity consortium paid R8.2 billion for the company is 2007. Before relisting last month, the company raised R9.7 billion in its initial public offering. A nice profit.

So there you have it, the ins and outs of private equity.

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