'Private Equity Firm' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
A private equity firm is a company that provides capital which is not from public stock exchanges. It is instead made up of private investors and funds. They invest their money directly into private companies or public companies via buyouts. When they take over a public company in this way, the entity becomes delisted from its stock exchange.
The capital or money for a private equity firm comes from a combination of retail and institutional investors. This money can be used for a variety of purposes. Some of these include acquiring other companies, funding startups and new technologies, improving an existing company’s balance sheet, or improving working capital.
Private investors who contribute money to these private equity firms must be accredited. This means they can prove by their income and assets that they can afford to tie up significant amounts of money for longer time periods. Many of these investments require substantially longer holding periods for distressed companies to be turned around. Similarly it can take years for start up ventures to reach the status of a liquidity event like an IPO initial public offering or sale to another firm.
The private equity market has grown to be powerful quite rapidly since the decade of the 1970s. Nowadays, more than one private equity firm will often work together to pool funds so that they can buy out enormous publicly traded companies. When these come together to do this it is often referred to as an LBO leveraged buyout.
An LBO provides huge amounts of funds to finance a massive purchase. Once they have completed this transaction, the private equity firms will work to improve the company’s balance sheet, financial health, and profits with an eye on ultimately reselling the bought out firm to another company or spinning the company back off using an IPO.
A private equity firm commonly receives two types of income from its investors. These are performance and management fees. Many of these companies assess an annual two percent management fee for all assets they handle. On sales of bought out companies, they commonly get 20 percent of all profits made.
Investment professionals are always interested in obtaining jobs with these private equity firms. The salaries can be enormous. With only a billion in AUM assets under management, such companies will usually employee two dozen or fewer investment professionals. These companies earn millions of dollars in fees between their management and performance fees.
Medium level volumes of from $50 to $500 million in deals will earn employees salaries in excess of $100,000. Vice presidents at such companies bring in around half a million dollars’ pay. Principals can easily surpass $1 million in salary. Bonuses can be on top of this when the companies realize good years.
Transparency calls began to ring out in the private equity world starting in 2015. This was because the earnings, bonuses, and incomes of practically all employees at almost all of these companies were enormous. This led a few different states in 2016 to start working on regulations and laws for a greater clarity on the inside dealings of these private equity firms. The American Congress in Washington has been resisting these efforts and trying to limit the amount of information which the SEC Securities and Exchange Commission is able to access.