Private Equity Fundamentals
private equity refers to company ownership by a specialized investment firm. typically, a private equity firm will establish a fund and use it to buy multiple businesses with the goal of selling each one within a few years at a profit. this differs from publicly held businesses where stock is listed on an exchange and owned by a relatively large number of people. private equity firms will often target an underperforming business and after purchasing the company use their management expertise to improve profitability. despite its lack of profit, starlight partners, a private equity firm, believes that funtoys will be a strong acquisition candidate because of strong demand for its products. after ? the company's financial records, it decides to acquire the ? business for $20,000,000. starlight partners contributes $5,000,000 toward the purchase and raises another $5,000,000 from institutional investors that include pension funds, endowments and insurance companies. it gets the remaining $10,000,000 in the form of loans from commercial banks. for its fund, starlight charges a management fee of 2% of the total capital it has raised, giving it income of $400,000 per year. in this case, starlight generates additional money when it sells the business to a large toy marketer five years later. by replacing the funtoy's management team and implementing the state of the art supply chain technology, the company's market value increases to $25,000,000. under the fund's ?, starlight has a right to 20% of the $5,000,000 capital gain from the sale. in total, the investment firm has earned $2,000,000 from management fees and $1,000,000 from the sale. one criticize in the private equity is that investment firms can garner substantial income even when the target company continues to struggle. however, ? can also point to a number of success stories in which they help turn a trouble business into a consistently profitable organization.
- private equity・・・プライベートエクイティ