Private equity is the name loosely given to an industry which draws capital into specific funds, managed by management groups, which may be quoted or unquoted. Hitherto, quoted funds or management groups have been rare, but there have been several in the UK, and some US groups have recently sought to list. Private equity groups take stakes, often involving control or full ownership, in companies across a wide array of industries.
The industry can be sub-divided into “venture capital”, typically invested in technology companies at an early stage of development (and where a group of investors may each take a relatively small stake); “growth capital”, typically invested in companies at critical points of expansion (and where an investor may take a stake of perhaps 20% of the equity); and “buyouts”, the largest and most high-profile part of the industry (where private equity funds take stakes, commonly involving control or full ownership, in companies whose size has recently increased substantially).
The industry has developed on the basis of contractual arrangements between professional investors, the limited partners, and management groups, who are contracted to advise and manage the funds in which they are typically also investors. There is substantial variety in structure, organisation and areas of focus, but private equity firms in buyout business, the principal focus of this review, typically follow a relatively straightforward strategy of investing in, buying, improving and selling companies.