Private Equity Definition

Private equity is a type of investment in which capital is provided to companies that are not listed on a public stock exchange. Private equity typically comes from institutional investors, such as pension funds, insurance companies, and endowments, as well as high-net-worth individuals.

The capital provided by private equity investors is used to finance a variety of corporate activities, such as mergers and acquisitions, recapitalizations, and buyouts. In return for their investment, private equity firms typically receive preferred shares or warrants that give them the right to purchase common shares at a later date.

Private equity firms usually have a specific Investment thesis that guides their investment decisions. For example, some private equity firms focus on investing in companies that are undervalued by the public markets and have the potential to generate high returns through operational improvements and strategic initiatives. Other private equity firms focus on investing in companies with strong growth prospects or those undergoing major changes, such as industry consolidation or technological innovation.

While private equity investments can be made in both public and private companies, the majority of private equity deals are done with privately held companies. This is because it is often easier for private equity firms to negotiate favorable terms with privately held companies than with publicly traded companies. In addition, many publicly traded companies are reluctant to take on the added risk associated with private equity ownership.