A private equity firm is a company that does not trade shares in the stock market but rather receives investment capital from institutional investors. Investments in private equity firms usually take the form of investment capital in a distressed or under performing company or the acquisition of said firm.
The Salesmen
Since they do not have any other method of raising capital, private equity firms rely almost exclusively on investors. Therefore, the most important people employed by any new firm are the fund raisers. As you might expect, it is the job of the fund raiser to attract investors with deep pockets. These employees must have exemplary communication skills and must be able to succinctly explain your business model to any interested investor. They are essentially your company’s sales reps and if they do not do their jobs the firm cannot continue to operate.
The Investors
The fund raisers deal primarily with major institutions like hedge funds, pension funds, and banks. Historically, these are the institutions most likely to invest in private equity firms. The reason they invest in these firms is because they promise them an extraordinary return on their investments.
Researchers
Researchers are the one who report to the institutions about the potential profitability of a targeted company. They are the ones who do the lion’s share of the grunt work, which includes crunching numbers, perusing analyst reports and generally just estimating the market value of the firm. Next the researchers will speak with the deal makers and decide whether or not the company is a sound investment.
The Deal
If the researchers and the deal makers concur that the targeted company is a solid investment, then things are put quickly in motion. It is the job of the deal makers to help facilitate a transaction and obtain the best possible price for their clients. Oftentimes, they work directly with the private equity firm and the targeted company. These deals can be worth tens of billions of dollars and can affect the fortunes of thousands of hard-working people.
After the Deal
Once the deal is made, employees of the private equity firm often take up jobs as managers or consultants with the new company. Their level of influence and involvement depends entirely on how much money they have invested in the company and whether or not they have acquired it. It is the job of these ''hired guns'' to make sure that everything runs smoothly during the transition and that the company gets rid of any dead weight. This often means massive layoffs of mediocre employees and new efficiency standards.
The private equity firm my even have a new CEO installed, whose job it is to deftly coordinate the new staff. All of the major players we have mentioned will continue to communicate until the investment ends. Eventually, it is the responsibility of the deal markers to compile a viable exit strategy. An exit strategy is a plan that allows the private equity firm to terminate their relationship with the company they have invested in or acquired and hopefully receive a substantial return on their investment.
In the end, private equity firms are not long term investors. They either invest in or acquire companies they believe to be undervalued. And as soon as they right the proverbial ship and return the underperforming companies to profitability, they often make off with a boat load of cash.
