A Private Equity Primer

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Unlocking a company’s growth potential 

Private equity is all around us, backing many familiar companies we use daily.

It’s been especially key to sustainability and growth for small to medium-sized businesses (SMBs). Yet it remains for most of us a mysterious and often misunderstood investment concept.

This summer, Forbes Magazine reported, “The private equity (PE) market is poised for growth as it continues to play a critical role in the economic recovery.”

What is private equity?

Put simply, private equity is a type of financing—an alternative form of investment in which a firm invests money in a private company (not publicly traded) to help it grow.

Along with venture capital, it is part of a large, complex financial sphere called private markets. Venture capital, for example, a somewhat more familiar concept to the general public, is an investment in a young or start-up company, which in return gives the investor equity in the company.

Private equity is similar but usually refers to making a large investment in a mature company and transforming that company to streamline it, make it run more efficiently, ultimately increasing productivity and revenue so that the business can then be sold at a significant profit. Private equity investors typically take a majority stake in ownership of the companies in which they invest.

Private equity investors work at PE firms, raising and managing capital, and seeking out companies that are likely to be strong investments. To leverage investments, they create a fund and raise (essentially borrow) money from limited partners, generally institutional investors such as public and corporate pension funds, insurance companies, foundations, and wealthy individual investors. After a certain benchmark of capital is raised, the fund is closed and one or more large investments in companies are made.

A private equity firm makes its money through management and performance fees, usually receiving 20% profit on the sale of a company.

Private equity is a long game for both the firm and the investors, as it can take several years to turn a distressed company around.

To understand private equity today, a bit of history is useful.

The first leveraged buyout, a more generic (and somewhat outdated) term for a private equity transaction, is considered to have taken place in 1901 when J.P. Morgan bought the Carnegie Steel Company from Andrew Carnegie for $480 million.

But PE didn’t really catch fire until the 1970s and particularly 1980s when it became somewhat notoriously associated with hostile takeovers, as well as large-scale buyouts that didn’t necessarily bring a solid return for investors.

Today, PE enjoys a much better reputation, for 3 primary reasons:

  • The public is gaining a better understanding of how buyouts can improve companies, help them build, and spur sustainable growth (minimizing the focus on restructuring and cutting jobs that scared many companies away).
  • Good PE deals focus fully on creating value for shareholders and the economy.
  • PE firms are now consciously committing to investing in socially responsible companies.

PE firms need to substantially improve and turn around a stagnant or distressed company to give their investors a healthy return.

The best PE firms know the value of established employees. Digital transformation, legacy system modernization, and business process unification—automating where necessary for efficiency—ultimately enhance a team’s performance and productivity, save money in the long run, and make the company more profitable.

Lukasa is built to help PE firms unlock the growth potential of the distressed companies they invest in and optimize return value for investors. Adaptable to the wide variety of industries supported by private equity, we come alongside a struggling or stagnant company as true partners. Bringing expertise in both business and technology, our comprehensive team reimagines the business and reinvents operations for maximum efficiency, modernizing and seamlessly integrating systems.

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Lukasa empowers small-to-medium-sized businesses by designing and implementing custom business and technology solutions that drive efficiency, productivity, and innovation, enabling them to stay ahead in today’s rapidly-changing competitive landscape.