Private Equity Key Terms

Study these key words to get started in the world of private equity

One of the hottest fields in finance in the last number of years is private equity. Private equity includes firms that offer venture capital as well as those that do leveraged buyouts. Essentially, a private equity fund can be raised to invest in whatever the fund managers want. Historically though, the most common investment field for a private equity fund is that of mergers and acquisitions. Because of this involvement, private equity firms tend to be closely tied to investment banking. In fact, many investment banks have started their own private equity branches in the past few years. Here are a few key terms to get you introduced to the world of private equity.

 

Private equity

Private equity is a source of finance in which the funds for investment are raised from institutions and high net-worth individuals. Private equity firms use the money raised from those sources to invest in other firms for short periods of time.
Try: Read the detailed discussion of private equity at Investopedia.

Venture capital

Venture capital is the money invested in different companies as well as any monies that are available for investment in the future. Venture capital focuses on companies in the beginning stages of development and companies that are still just "ideas." Venture capital is one of the oldest types of private equity.
Try: SearchCIO-Midmarket.com offers this detailed discussion about venture capital and what it has to do with private equity.

Investment banking

Investment banking, as an industry, matches those who need financing with those who want to invest their funds. Investment banking firms often help private equity firms identify potential targets for purchase, and assist in arranging financing through so-called private placements. It pays for private equity firms to maintain a relationship with investment banks because this is an important source of information about targets for buyouts.
Try: wiseGEEK offers a helpful definition and explanation of investment banking.

Leveraged buyouts

Leveraged buyouts are very controversial transactions sponsored by private equity. In a leveraged buyout, a private equity firm uses significant levels of debt financing to purchase a public firm and make the firm private. This type of transaction is the "bread and butter" of private equity.
Try: When you’re looking for a comprehensive explanation of leverage buyouts, check out The Library of Economics and Liberty.

Private equity fund

A private equity fund is a partnership with a finite life (usually 10 years) that is set up to provide private equity financing. Private equity financing is used for firms that do not want to secure public financing, either in the form of a stock issue or debt issue. The private equity fund is sponsored by a general partner who seeks limited partners to provide funds. The private equity fund then seeks out possible firms to buy in the public market.
Try: Farlex provides TheFreeDictionary.com and presents an excellent definition and discussion of private equity funds.

Mergers and acquisitions

Mergers and acquisitions are the most visible area of private equity involvement. Private equity funds often conduct mergers and acquisitions, planning to turn around the target firm or resell the target to another fund. Mergers and acquisitions are the main area where investment banks help private equity firms.
Try: Check out QuickMBA.com to find out what mergers and acquisitions are and how they're related to private equity.

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