Private equity funds add key manpower for future growth (2024)

FAQs

What is private equity growth strategy? ›

In growth equity, also known as “growth capital” or “expansion capital,” firms invest minority stakes in companies with proven markets and business models that need the capital to fund a specific expansion strategy.

Portfolio Oversight and Management

For more established companies, PE firms tend to think they have the ability and expertise to turn underperforming businesses into stronger ones by finding operational efficiencies and increasing earnings. 11 This is the primary source of value creation in private equity.

By streamlining operations, improving working capital, enhancing revenue generation, controlling costs, reducing debt, pursuing strategic investments, and nurturing a culture of operational excellence, portfolio companies can enhance their financial performance and increase their value.

Similar to a mutual fund or hedge fund, a private equity fund is a pooled investment vehicle where the adviser pools together the money invested in the fund by all the investors and uses that money to make investments on behalf of the fund.

Private equity funds are generally designed to focus on one of the following types of strategies: Venture capital – Providing equity start-up capital for early stage ventures, usually in a particular industry sector or geographic region.

Private equity firms commonly deploy various strategic approaches to achieve their investment objectives. These strategies encompass A) leverage buyouts, B) growth capital investments, C) venture capital initiatives, D) secondaries, and E) fund of funds structures.

Private Equity Valuation Metrics

Equity valuation metrics must also be collected, including price-to-earnings, price-to-sales, price-to-book, and price-to-free cash flow. The EBITDA multiple can help in finding the target firm's enterprise value (EV)—which is why it's also called the enterprise value multiple.

A track record of success matters. PE firms want to know they are acquiring a target company which has a history of profitability and cash flow generation. This type of company is seen as a more stable and reliable investment with a higher potential for value creation.

Clear Market Opportunity

This is another factor where private equity investors are attracted. A business with clear market opportunities and a strong growth strategy will definitely make a place in the market to grow.

Why do investors prefer private equity? ›

Because private equity investments take a long-term approach to capitalising new businesses, developing innovative business models and restructuring distressed businesses, they tend not to have high correlations with public equity funds, making them a desirable diversifier in investment portfolios.

But in reality, today's private equity firms are focused on driving value through revenue growth vs. cost reduction while offering people, processes, and technology that can help owners and entrepreneurs to grow businesses, increase headcount, and generate a return for all parties involved.

How do private equity funds raise money? Private equity funds raise money from investors, who become limited partners (LPs) in the fund. These investors can range from large endowments to high net worth individuals. Commitments for investment from LPs are solicited through marketing roadshows.

They not only provide much-needed capital to firms in industries with possible high growth potential but may also offer management expertise. By injecting capital into these businesses, private equity could aid in propelling economic growth during expansion phases.

While private equity (PE) typically focuses on mature businesses, often through leveraged buyouts and operational improvements, growth equity (GE) concentrates on companies that are poised for rapid expansion and have the potential to disrupt their respective industries.

Primary driver of returns – While private equity firms typically generate returns primarily from debt reduction in leveraged buyout (LBO) transactions, growth equity firms generate returns primarily from increases in revenue or profit, resulting in a larger equity valuation at time of sale.

Growth investors seek companies that offer strong earnings growth while value investors seek stocks that appear to be undervalued in the marketplace. Because the two styles complement each other, they can help add diversity to your portfolio when used together.

Growth Investing vs. Value Investing. Where growth investing seeks out companies that are growing their revenue, profits or cash flow at a faster-than-average pace, value investing targets older companies priced below their intrinsic value.