A private equity firm, sometimes shortened to “PE Firm”, is an investment management company. This is not to be confused with a private equity fund which holds the capital available for investments providing the necessary financing. Sometimes referred to as a financial sponsor, the firm raises funds that will be invested in accordance with its mandated investment strategies.
Firms may raise capital from outside sources or they may commit their own capital as equity. Similar to a regular investment fund, these Private equity firms receive a management fee, usually charged monthly as well as a performance fee on profits generated from the funds under management.
Private Equity Firm - Business Model
It is normal for private equity firms to invest in longer term projects. This may be a specific industry segment or special situations such as distressed debt. Investments made are often dependent on the personnel at the firm and their area of expertise. It is common for firms to undertake operational roles to manage risks and achieve growth in an acquisition. Especially is the target is a turn-around project at a struggling company. This approach lends itself to a longer term investment strategy. This involvement is different to hedge funds who tend to make more short-term trades by being both long and short stocks at the same time.
A well-known private equity firm is Kohlberg Kravis Roberts, KKR, founded in 1976 by Jerome Kohlberg, Jr., and cousins Henry Kravis and George R. Roberts. Their 2007 buyout of TXU is the largest buyout completed to date. More PE firms such as Vintage Capital, can be found in our spread tracker spreadsheet in the acquirer column.
