Private Equity is another one of those often-used but seldom-understood pieces of business jargon thrown around in finance discussions all over the internet.Even when you Google the term itself for a definition, it often leaves people either scratching their head in wonder or left fostering a false belief of understanding.
In order to try and settle on a good definition of private equity that most people can understand and to put forward why it is important to understand it, we’re going to take a crack at making this term simple.
So What is Private Equity?
To begin breaking down the meaning of private equity, we’ll start with the first definition you will come across when you search “what is private equity” on Google; the following definition appears:
"Private equity is capital that is not noted on a typical trade. Private equity is made out of assets and financial specialists that specifically put resources into private associations, or that take part in buyouts of open organizations, bringing about the delisting of open value."- Investopedia
We can break this down into several digestible chunks to further understand what this definition actually means:
- Private equity is essentially money which is not seen on any public company or finance listings.
- This money comes primarily from individuals with a high net worth who invest in shares of private companies which are not on the public exchange.
- These funds can also be used in buying out a company which is on the public exchange, essentially taking it off the public market so no one else can decide to buy it themselves.
- Simply put into one sentence: Private equity is private money from rich people used to buy ownership of both private and public companies.
But Why is Private Equity So Important?
Top and Largest Private Equity Firms Importance? The main reason why private equity is so important is because the money generated from managing private equity is upwards of millions of dollars. When private equity funds are properly put to work by professional fund managers with years of experience, the payout can be ridiculously high for stakeholders. This is why private equity firms in Asia, America, and Europe are seemingly popping up almost everywhere.
It is absolutely no surprise that this industry is pulling in the very best talent from all over the world; after all, it is these people who are being paid to handle the heaps of money that big corporate giants are trying to grow.
It would be a mistake to think that it is simply just investing money into buying public and private business in order to make a quick buck. This is also about top private equity firms developing a trusted portfolio of successful transactions which will earn them prestige in the financial world. More prestige and a good reputation equal more high net worth individuals using that firm’s services to generate even more capital and ownership of more of an industry.
But How Does This Affect Me as an Individual?
While you might think that what goes on in the world of private equity does not affect you one bit, you would be mistaken. Even if you’re someone with no ties to the financial world in terms of business, largest private equity firms is playing a role in what businesses you buy and rent from, how high their prices are, and whether they even exist or not.
Plenty of entities and institutions have used private equity as a means to scoop up familiar companies, like large supermarket chains and online service providers, strip them of their useful parts, and leave them in the dust. Such is the competitive world we live in, sometimes it is simply easier to buyout your competitor and drive them into the ground instead of out-competing them.
This might sound harsh at its core, however, it is instances like this which can keep the most competitive companies alive – often the businesses that are striving the best products or services possible to their consumers. At its extreme it can force a monopoly, however, many modern countries set up systems in such a way that this cannot happen easily.
The Main Take-Away Information
At the very worst, we hope you move on from this article knowing what private equity means and why it is often mentioned in the financial world. You don’t have to be a businessman or women or a financial times reader to understand that a lot of these terms are not as complex as they sound.
If you would like to learn more about the ins and outs of private equity and why it is used, there are many resources across the web which you can use to get yourself in the know. Consider Entrepreneur’s Beginner’s Guide to Private Equity which will give you a richer background of private equity.