Private equity is an investment route for non-public companies. PE money is consider to be savvy enough to do their own due-diligence on companies, since public information is not available. PE returns potentially can be high, but on average appear to have returns from buy outs similar to the broader stock market1. PE suffers from a liquidity issue because companies have to traded within the PE investors or other sophisticated investors (other PE or other companies). Alternatively the investors can exit by going public via an IPO and converting equity into liquid/tradable shares2.
Private equity is intertwined with the leveraged buy out (LBO).
In Plunder, Brendan Ballou outlines the variety of ways private equity can make a deal profitable:
- Leveraged Buy outs for eventual flipping (see above)
- Lease backs (selling a companyâs real estate and then having the company lease it back)
- Dividend Recaps
- Strategic Bankruptcies
- Forced Partnerships
- Tax Avoidance
- Rollups
- Operational Efficiencies: layoffs, price hikes, and quality cuts
1. Barber, F. & Goold, M. The Strategic Secret of Private Equity. Harvard Business Review (2007).
2. Wang, J. J. Central Banking 101. (Joseph, 2021).