Top 25 Private Equity Firms
Private equity firms attract investors like bees to a flower because they provide higher returns than public stock markets. The year 2021 was a watershed year for the private equity market as investment volume topped the trillion mark for the first time in history. The overall value of all 24,520 agreements concluded was $1.04 trillion, almost twice the amount from the previous year. During the first six months of 2022, private equity firms produced $512 billion in buyout transaction value worldwide, putting them on track to achieve the second-highest yearly total ever. Despite these statistics, we must point out it is an equally high-risk investment industry, and only high net-worth individuals (HNI) and accredited investors can participate in it.
This article aims to explain how private equity firms function and how different types of private equity firms and top private equity firms create value for businesses and their investors.
Private equity and PE firms
Private equity is investments in businesses not traded on a public exchange. Private equity (PE) is an alternative investment capital provided by extremely wealthy people and corporations that buy into or take over publicly traded businesses to make them private again and delist them from stock exchanges. Private equity firms source capital from these entities and deploy it wisely to maximize returns for their investors over four to seven years. Keep reading to understand the concept in detail.
What is private equity?
Simply put, private equity refers to investment partnerships that purchase, operate, and sell businesses. Private equity firms manage these investment vehicles on account of authorized and institutional investors.
Investment funds specializing in private equity may either make whole or partial acquisitions of private or public firms or participate in buyouts as part of a larger group of investors. Stocks in publicly traded corporations are not common among these investors.
When discussing alternative investments, private equity is often categorized alongside venture capital and hedge funds. Since these investments often demand large sums of money be put up over a prolonged period, only wealthy institutions and people have access to them.
How does private equity work?
Private equity uses capital from institutional and high-net-worth investors to invest in a wide range of assets. Private equity firms put money into troubled assets, such as leveraged buyouts of businesses, to improve their financial standing or prepare them for an initial public offering. Real estate investment trusts, property financing, and venture capital funds are all possible investments.
Most private equity firms and funds invest in established businesses rather than start-ups. They invest in businesses and then work to grow or otherwise extract value from their holdings so that they may sell them at a profit later on.
Stakeholders of private equity firms manage the group’s assets for fees and a portion of the earnings beyond a certain level, known as the hurdle rate, in return for operating the fund and raising cash from clients.
Typically lasting between 7 and 10 years, private equity firms do not allow for withdrawals throughout the investment period. However, after a certain period, the funds usually begin returning capital to shareholders. In 2021, private equity firms typically hold onto their portfolio companies for five years.
How does private equity create value?
Private equity firms usually have a strategy to maximize the value of their investment before it ever buys a business. Owners of private equity firms who know they only have a short period to increase their investment’s worth sometimes push for dramatic changes in strategy.
Top private equity firms often have access to skills that the company’s previous leadership lacked. It might aid the firm in creating new modern plans, embracing new technologies, or expanding into new areas. When purchasing a business, private equity firms can bring in their management team to drive these ideas forward or keep the current team in place to carry out the deal.
Without quarterly profit projections to fulfil or public investors to appease, the acquired firm can make operational and economic adjustments as it sees fit. Management may be able to adopt a longer-term perspective if private equity is the majority shareholder, but only if doing so doesn’t compromise the owners’ desire for the highest potential return on investment.
Private equity example
Carve-outs are a sort of private equity purchase in which investors acquire a subset of a bigger firm, usually a non-core business that has been placed up for sale by the parent organization. Two examples include the 2014 purchase of Tyco Fire & Security Services Korea Co. Ltd. by Carlyle from Tyco International Ltd. and the August 2022 announcement that Francisco Partners will buy Litmos’ corporate training platform from the German software giant SAP SE (SAP).
What are private equity firms?
Given the size of most private equity funds, they seldom function independently. They are gathered by the private equity firms, which have the organizational framework to quickly and significantly increase the value of their investors’ capital. Institutional investors and high-net-worth individuals (HNIs) pool their resources to form a private equity business.
When choosing an investing partner, private equity firms are picky. Most reputable businesses restrict investment to a select group of approved individuals. Large private equity firms sometimes list on public stock exchanges, with the original investors still controlling most of the company’s stock.
Professional investors are responsible for the successful raising and management of these funds. The two most important sources of revenue for private equity firms are the asset management fee (often between 20% and 30% of the proceeds from a company’s sale) and the performance fee (typically between 2% and 5%).
What do private equity firms do?
PE firms provide an important dual purpose, i.e., transaction, execution or deal origination and Investment portfolio management.
- Deal Origination – Private equity firms may increase the number and quality of the deal flow they get from M&A intermediaries, financial institutions, and other transactional consultants. Several top private equity firms employ full-time personnel to find business owners and contact them. Successful deployment and investment of raised capital depend on locating proprietary opportunities in today’s competitive M&A market.
- Evaluation – Management, the sector, past financials and predictions, and value evaluations are part of the transaction execution process. The deal experts will propose after receiving approval from the investment committee to explore a potential acquisition prospect.
- Due Diligence – If the parties agree to proceed, the due diligence process will be carried out with the help of financial institutions, accountants, attorneys, and advisors. Management’s claimed operational and financial numbers must be verified as part of the due diligence process. Consultants may uncover important and potentially deal-killing obligations and risks during this process.
How do you invest in private equity?
Investing in private equity requires a lot of capital, and top private equity firms are only open to qualified customers and accredited investors. If you qualify to invest in private equity, you can study the private equity investment techniques to make a wide variety of investments. Investments in Leverage buyouts and Venture capital firms are two of the most typical types of acquisitions. Let’s understand in detail.
- Leverage buyouts – Private equity firms use financing secured as debt with a target company’s activities and assets as collateral to buy the business. If successful, the acquirer (the PE firm) will be able to utilize the target as security to finance the acquisition of the target. Companies may be taken over by private equity (PE) firms with little or no money down via a process called a leveraged buyout (LBO). Private equity firms try to increase their return on investment by using leveraged investments.
- Venture capital – Venture capital (VC) is a broader word for making an equity investment in a startup or a relatively new sector. If there is potential in such industries and, more crucially, in the target business itself, which is being held back for reasons like a lack of sales, working capital, and debt funding, then it is something that private equity firms will frequently recognize.
Private equity firms might invest heavily in these businesses with the expectation that they would develop into market leaders. Top private equity firms end up providing intangible benefits to their targets by mentoring the latter’s frequently inexperienced management.
Difference between private equity and crowdfunding
Companies and individuals may have access to capital via private equity. The investor is given either debt or stock in return for a stake in the company. This is known as equity crowdfunding, short for private equity crowdfunding.
Crowdfunding is a way to raise funds from the public. People may use crowdfunding platforms like GoFundMe, social media, or online forums for fundraising for causes. However, in equity crowdfunding, investors contribute a modest amount of money in exchange for a stake in the company. Businesses can use platforms like Wefunder, Crowdfunder, SeedInvest, AngelList, and CircleUp for online equity crowdfunding.
The Securities and Exchange Commission (SEC) established rules for businesses to have a means of funding. There are restrictions in place, including limits on total funding and the number of participants who are not accredited investors.
Top private equity firms
|Rank||Private Equity Firm||5-Year Funds Raised ($B)||Notable Current Investments|
|1||The Blackstone Group||95.95||Refinitiv, Merlin Entertainments|
|2||The Carlyle Group||61.72||ZoomInfo, PPD|
|3||Kohlberg Kravis Roberts & Co.||54.76||Axel Springer SE, Epic Games|
|4||TPG Capital||38.68||Cirque du Soleil, Cushman & Wakefield|
|5||Warburg Pincus||37.59||Airtel, Sundyne|
|6||Neuberger Berman||36.51||Marquee Brands, Telxius|
|7||CVC Capital Partners||35.88||Petco, Premiership Rugby|
|8||EQT Partners||34.46||Dunlop Protective Footwear, SUSE|
|9||Advent International||33.49||Cobham, Serta Simmons Bedding,|
|10||Vista Equity Partners||32.1||Finastra, Mindbody|
|11||Leonard Green & Partners||26.31||Lucky Brand, Signet Jewelers|
|12||Cinven||26.15||Kurt Geiger, Hotelbeds|
|13||Bain Capital||25.74||Virgin Voyages, Canada Goose|
|14||Apollo Global Management||25.42||ADT, Chuck E Cheese's|
|15||Thoma Bravo||25.29||Dynatrace, McAfee|
|16||Insight Partners||22.74||Monday.com, HelloFresh|
|17||BlackRock||22.46||Authentic Brands Group, Qumulo|
|18||General Atlantic||22.42||Airbnb, Vox Media|
|19||Permira||22.21||Dr. Martens, Informatica|
|20||Brookfield Asset Management||21.69||Multiplex, Westinghouse Electric|
|21||EnCap Investments||21.33||Pegasus Resources, Lotus Midstream|
|22||Francisco Partners||19.13||Verifone, GoodRx|
|23||Platinum Equity||18||Livingston International, Palace Sports & Entertainment|
|24||Hillhouse Capital Group||17.89||Miniso, Belle International|
|25||Partners Group||17.87||Civica, KinderCare Education|
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