Private equity is an umbrella term for investments in
non-publicly traded companies in various stages of development. Private equity
investments can occur as venture capital, mezzanine financing (e.g., convertible
loans or silent partnerships) or even leveraged buyouts. Unlike with borrowed
capital financing, private equity investments are not typically secured and the
investment firm must take on all business risk.
The investor acts as a temporary partner who attempts
to earn an appropriate rate of return in exchange for his commitment and
participates in the company`s value growth. He therefore supports the firm in
achieving its goals by providing guidance and access to its networks. The
selling price depends primarily on the success of the company. The investor
thus seeks to cooperate closely with management.
The need for private equity can arise in the life
cycle of a company for various reasons. A distinction is made between start-up
financing, growth financing, acquisition financing, turnaround financing and
financing as part of a change in owners. Private equity investors offer the
possibility for raising the necessary equity. Various types of investors cover
the private equity segment: private equity funds, listed or private investment
companies, direct investments by family offices or private individuals.