Private equity is a term that gets thrown around a loot in the financial sector, but a surprising number of people don’t fully understand what it means. Without a solid understanding of AMMA Private Equity and how it works, an individual can’t understand the fullness of business investment, financial investments, and how they all work together.
The technical definition of private equity is that it is an “asset class” that consists of debt and securities from privately owned companies. While that clears up information for some individuals, it’s not a great description for the novice. Put in a more simple way; private equity is any investment in a private company for the purpose of getting partial ownership. This often translates to a part of the windfall when a company is sold, but it can also result in consistent profits and payments being made as long as that individual has ownership.
Although it would be too simple to call private equity the privatized equivalent of public stocks in private companies, the basic concept is in the right general area.
Who Practices Private Equity?
Private equity is a two-part relationship. That of the investor, who holds the private equity, and the privately owned business or company willing to sell a part of their ownership in exchange for often badly needed capital and sometimes (though more rarely) some mentorship or guidance towards growth and a buyout.
The investors can come in several different forms. Previously Private Equity Firms were among the main ones to participate in this practice. These are companies whose agents are trained, experienced, and talented at locating public companies about to go private or private companies looking for more funding to grow. They do their homework, analyze opportunities, and make educated guesses on which private businesses are more likely to help them turn large profits within a reasonable time frame that is most often between 4 to 7 years.
Private equity firms can be invested in by individuals who help bankroll the firm, and as a result get to share in the profits (if any). A truly good private equity firm can make a serious amount of money.
More common in recent years is the rise of Angel Investors. These are wealthy individuals who are going to invest their money, or as a small group of wealthy individuals who are investing together in businesses. This takes the firm out of it and allows many small businesses and entrepreneurs to attempt to raise money and investment via private equity from self-made businessmen who have been in their position before.
On the other side of the deal are private companies that want capital and need investment but don’t want to go public (or go public yet). They are looking for financing to either get through a hard time, expand, or scale up and prepare for a buyout. They need to be able to show there is a very good chance that they will become extremely profitable within a few years and that scaling is possible. Often this is much easier done with funds, and that is where private equity funding can be good for both parties.
Private equity can work a little bit differently from one deal to another, and often terms of those deals are clear between the two parties but hidden from the public. While this won’t be something for everyone, for high capital investors this offers some unique opportunities to invest in something tangible with the potential to give enormous returns. Understanding private equity lets you understand the financial world just a little more.