What Is Private Equity

Private equity comes in many shapes and forms. We’ve all heard some of these forms used on television. Leveraged-buyout, capital growth, and venture capital are terms we are familiar with. While the term private equity has various connotations around the world the term usually means private investment.

This private investment is best described as a group of people that have pooled their assets together. They offer that capital to new and existing business. This can be advantageous for those that cannot get a bank loan. Maybe a new business is considered risky by the traditional bank but would be considered an opportunity by the investment banker group. Sometimes the trade off will be an additional cost but the end will justify the means.

Venture capitalists and private equity have played an immense role in the development of new businesses. Without their timely investments many businesses today would not exist. For instance, computer security breaches have continued to rise. Many new companies are meeting this challenge because of the millions provided by investment bankers in the form of private equity loans. American industry would not be able to respond as quickly to needs such as this without the help of private equity loans and the venture capitalist.

The role of an investment banker and private equity does not stop with the development of new business. Leveraged-buyouts of existing companies are also the role of a venture capitalist. Many companies and jobs have been saved as a result of leverage buyouts. So don’t believe the bad press. The repackaging plan is one example of this. A public company is purchased, reorganized, and then returned to the marketplace.

In the process of repackaging a company many jobs are saved and new growth is realized. Next is the portfolio plan. The portfolio plan usually benefits everyone. In this case the company will use private equity to purchase one of its competitors that may be in trouble. This increases the new company’s overall value. Most of the employees in the new company are retained and shareholders receive a good return on their investment. In some cases the business can be saved from closing its doors.

We are also beginning to see private equity stepping in to save the American banking system. The Seattle Times reported Sterling Financial raised enough money from private equity to prevent Washington’s second-largest bank from being seized and sold. A team of 30 investors agreed to put up almost 400 million in private investment using stock for collateral. This deal has saved the bank from closing its doors and salvaged countless jobs throughout the state of Washington.

In fact, the role of private equity can be seen everywhere. Private equity bankers have also invested in Hollywood. Your favorite movie was probably made possible with financing from private equity. Many medical miracles and technologies are also financed by private equity. Water filtration methods for consumer and medical applications along with on-site drug testing and various other inventions are available today because of private equity.

There are several other types of equity financing. Some of them are bootstrap funding, management buyout, divisional buyout. Bootstrap funding can be as simple as using a credit card to supplement funding needs. The management buyout removes the upper echelon of company whereas a divisional buyout will only purchase sections or divisions of a company.

It is clear to see that private equity plays a huge roll in the development of new business and the expansion of existing business in America. This makes the investment banker an unsung American hero.