PE firms typically fund investments using a mixture of equity financing and debt financing, and may also co-invest with other organisations.
Equity
PE firms will use some of the capital raised from investors (i.e. the capital pooled within a fund) to fund part of the cost of an investment. This capital forms the equity portion of the deal.
Debt
PE firms will also often borrow significant amounts of money to finance part of the investment. This debt can come from various sources, including commercial banks, investment banks, and private debt funds. In return for lending the money, lenders will take security over the investee company’s assets and future cash flows.
Debt is typically repaid using the investee business’ operating cash flows and/or through the proceeds received from sales of some of the investee business’ assets during the investment period.
Co-investment
In some cases, PE firms may partner with co-investors, for example other private equity firms, institutional investors, and sovereign wealth funds. Co-investors provide additional equity capital alongside the private equity firm (thus sharing the financial burden), which helps to diversify risk, and can facilitate larger transactions.
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