How do private equity firms work? What do they do?

I was wondering what Private equity firms do? buy out small companies?

How do they differ from a brokerage house or a scottrade for example?

Private equity firms collect assets from investors (individuals, institutions, etc.) that they then use to make buyouts (or other financial arrangements) of other firms.

Many times they do buy small businesses but they have also recently begun to dip their hands into the purchase of publicly traded large cap companies.

By collecting money from lots of investors, private eq firms have more leverage in the markets than an individual investor could have. They use that leverage to seek out the best deals for their investors. Many times they will restructure the management of companies they buy and/or take advantage of synergies between multiple companies they own. This makes the company more efficient and more profitable.

Brokerage houses like Scottrade simply hold your money and then YOU make the decisions about what to invest in. When you entrust your money to a private equity firm, many times you must agree to leave it with them for a set period of time (say 3 years) and THEY make all the investment decisions. You are just the willing beneficiary.

Hope that makes sense. Private equity deals can be very complicated and that is a very basic description.

A private equity firm is similar to a mutual fund in the aspect that it is a pool of money from investors. This type of firm is not opened to the public. It is composed of what is called accredited investors. An accredited investors is defined by sec regualtions. They basically are high net worth individuals. Private equity firms are not regulated by the sec. They can invest in anything they want. Their investments are not restricted like mutual funds. This is why they are limitied to high net worth individuals who are suppose to be investing savvy. Sometimes they buy out whole companies. The companies are sometimes big or small. The equity firm is trying to invest where ever they fell they can get the best return on their investment.

Check out the wikipedia article.

They buy companies outright to gain management control and then try to sell them - either back to the public market or anybody else - for a profit at some time later.

There is PE all across the spectrum for company sizes. If I buy the Baskins-Robbins store in my neighborhood for $200k, I'm buying it in a private equity deal. Bigger PE firms, buy big companies. But, there's nothing stopping you from going out to try to buy a whole company. You'd just need to find the financing to do it - through a mix of debt and equity. Same as buying a house.

Currently, the PE market is on fire because interest rates on debt is much cheaper than the yield from equity (borrow and 5.5% to buy a company yielding 8% = profit).

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