Private equity firms are investment firms that deal with millions, even billions, of dollars. Equity fund managers like Marc Leder from Sun Capital Partners have worked very hard to create a process that takes as much risk as possible out of their investment and work. It is now agreed, therefore, that there are seven key stages to managing private equity firms, and these are accepted the world over.
Stage 1 – Fund Raising
The majority of private equity firms are made up of a number of high net worth individuals, as well as some external funds such as institutions, endowments, and pension firms. The firm itself is the general partner. Before any capital is raised, the different partners come together to agree on a fund size. Depending on the economic climate and the strength of the firm, they are able to achieve this. It is common for successful firms like Sun Capital Partners to be oversubscribed, meaning that they have more money than they need.
Stage 2 – Searching for an Acquisition
Once the money has been collected, the portfolio for investment has to be built. Marc Leder, for instance, spends a lot of time meeting directly with companies that want to sell. Often, this is done with an investment banker as mediator.
Stage 3 – The Investment
Once a company has been identified, they go through the process of merger & acquisition, taking over ownership of the company.
Stage 4 – Corporate Growth
People like Marc Leder have devised a number of aggressive growth strategies to ensure value is increased. When this happens, the entire investment portfolio increases as well.
Stage 5 – Divestment
Private equity firms do not want to stay invested for an infinite period of time. This means that, eventually, they will liquidate their portfolio, for instance by selling to another firm, through strategic acquisitions, through IPOs (Initial Public Offerings), or buyouts. This leads to a liquidity event, when the private equity firm receives their money back.
Stage 6 – Capital Gains
A private equity firm has two main streams of income. The first is the money they receive from their members and the second is the money they get from selling companies that they have invested in. Ideally, they achieve capital gain, meaning that they make a profit.
Stage 7 – Dispersal
Last but not least, the money from the capital gain, if it is available, is dispersed between the different partners of the private equity firm.
Once these seven steps have been completed, they start again. Professionals like Marc Leder start to search for the next fund again. Generally speaking, they go through each of these phases continuously, as they don’t just invest in a single company. Rather, they constantly look for other companies as well. It is also very common that the next portfolio company to invest in is found through the company they are currently investing in. It is a complex area of financial investment and one with very high risks, but also one with tremendous returns.