Private equity (PE) is a type of investment which consist equity securities and debt in private companies which are not publicly traded on stock exchange. Private companies refer to firms with private ownerships, and almost all companies in the U.S were started as private owned. When investing private equity, funds usually goes directly to private companies. Also, private equity investments can also engage during the buyout process of some public companies. These public companies are likely delisting after this process and become private with securities being removed from a stock exchange.

How do private equities work?

When private equity firms want to make investments, they need to raise fund. The first step of fund-raising process is to send prospectus to potential investors who may interested on such investment. Usually, the investment of private equity comes from institutional and other accredited investors. These investors have the ability to put in large amount of fund for a long period of time for the reason that private equity investment requires a long holding period for distressed companies start making profits or an initial public offering (IPO) take place.

After the private equity firm has enough commitments, the next step is to call for commitments in order to make an investment. The fund required depends on each investment activity and firms are able to raise new fund if they want to expand their investments. Private equities have limited partners and general partners. Limited partners have limited liability and 99% of shares. Meanwhile, general partners own 1% of shares with full liability. Typically, private equity firms use fund for a fixed period of time (normally 10 years).

Private equity firms are being very selective on investment candidates by reviewing its profile and business plan since they want to ensure their investment will grow by the end of certain time period.

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