Journal Report

Journal Report 8: Private Equity

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What is private equity?

PE firms are part of the fabled ‘buy-side’ PE is one of the most praised types of work in finance. The typical route into private equity is after having spent 2 years at a top IB and/or completing an MBA at a top business school. For an excellent insight into the Private Equity world, read “Barbarians at the Gate”.

Private Equity Definition

The definition of PE is simply money invested into a private company or the privatization of a company through the investment of outside money.

  • Basically, what PE firms attempt to do is to invest into a company, take a majority stake, improve the company and then exit their investment at a large profit.
  • In order to magnify returns, PE firms make use of leverage (borrowed money) to conduct Leveraged Buyouts (LBOs).

Private Equity firms can either focus on a specific sector (Energy, Technology, Healthcare etc.) or operate across a broad spectrum. The larger the firm, the more likely it is to cover more sectors.

How Do Private Equity Firms Work?

PE firms will typically acquire 100% of the target company and make use of a combination of cash and debt to finance the acquisition.

  • The advantage of using debt is that the return on equity is higher and they can undertake bigger/more investments. When the target company is acquired, the future cash flows are used to pay off the debt used.
  • If the PE firm in question is using leverage, they will require a financial sponsor (typically a bank) to loan them the money.

The aim of the investment by the PE firm is to take a business, increase its value and then sell its share in the business. Typically, PE firms will target 20% return per year. The way the firm will improve the business can be anything from replacing the management, reducing costs, improving efficiency or many other possible actions. PE investments are usually not that risky (at least compared to VC) because the target firm is usually quite large and is unlikely to collapse in value.

What Do You Do In Private Equity

As a junior employee in PE, your work is actually quite similar to that of IB, but the hours are (usually) less and the pay is (usually) more. The work will involve valuing companies, modeling for mergers / LBOs, conducting DCF analysis, etc.

Content source: Wallstreet Oasis (2020) Frequently asked question. Available from: https://www.wallstreetoasis.com/frequently-asked-questions [Accessed 14 February, 2020]

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