Private Equity – what are PE funds and how do they work?

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What are private equity funds?

Private Equity funds consist of medium- to long-term investment in the development of private companies not listed on public markets. Listed companies can be subject to Private Equity only exceptionally, and the operation then consists of delisting them from the stock market.

A typical investment with the participation of a fund lasts from 3 to as much as 7 years and involves active cooperation between investors and the company’s management, which aims to generate profit through capital growth.

Unlike Venture Capital, which is based primarily on investing capital in companies with short histories and unestablished positions (e.g. startups), Private Equity is based on buying out part or all of companies with significant economic potential and further increasing it through skillful management.

Through Private Equity, investors also acquire companies at a late stage of development – planning to restructure, transform, and go public. Thus, there is no question of investing in high-risk companies that are only functioning at the stage of forming an idea or early expansion as in the Venture Capital model.

How do such funds invest?

Private equity deals allow them to generate huge profits. Globally, in 2021, the total value of buyout transactions exceeded $1 trillion. Not surprisingly, this form of investment is attracting increasing interest from market participants. Over the years, investment strategies in this sector have changed as transactions have globalized. Today, operations are mainly based on:

  • leveraged buy-outs – the acquisition of a company by investors providing equity, financed with debt;
  • fund of funds – the investor’s portfolio consists of other investment funds rather than specific securities, such as stocks or bonds;
  • secondary investments – an operation whereby an investor buys back a stake in another PE fund;
  • equity coinvestment – a minority investment made by an investor in an operating company together with another PE investor;
  • debt financing – funds are raised from a third party from private or public sources; a characteristic type of debt financing is so-called mezzanine.

Pros and cons of private equity funds

The main advantages of Private Equity include the company’s stable growth and lack of exposure to the vagaries of the public market. Relying on private investors also makes the company avoid applying for a high-interest loan or credit. At the same time, access to private capital makes the company’s potential grow rapidly.

For potential investors, this sector is also very flexible and offers diverse financing opportunities, far greater than the public sector.

The main disadvantages of PE funds are indicated as the need to invest a lot of capital and the return of profits distant in time. One often waits even several years for the results of the investment. Due to the need for investors to cooperate with management, there may also be potential difficulties in developing a joint development strategy.

Legal services for Private Equity funds

Linke Kulicki Law Firm has many years of experience in providing legal services to Private Equity funds. We support both the investors and the investee. We offer ongoing internal corporate services and support ongoing investments at every stage. For our clients, we conduct due diligence, prepare the necessary documentation and handle investment exits, taking into account the protection of the interests of the represented entity. We conduct IPOs, bringing private companies to the stock market.