Private equity

Check out our dedicated private equity course for much more detail on what private equity involves, as well as insights into the role of private equity lawyers.

Private equity firms generally invest in target businesses that have high growth potential and are not listed on a stock exchange (although private equity firms might invest in public companies with the intention of “taking them private”, meaning such companies would no longer be listed on a stock exchange). They will usually pool money from external investors into what is known as a “fund”, then use the money in that fund – as well as money borrowed from lenders – to finance their acquisition of, or investment into, a range of businesses. 

During the investment process, private equity firms may initially look at 100 businesses, consider 10 of these in more detail (which may involve carrying out due diligence and commencing early negotiations of terms) and end up purchasing only four. These businesses will typically be established companies that are either underperforming (e.g. because of operational inefficiencies) or undervalued. Once an acquisition or investment has been completed, a private equity firm will then work with the business and its management team to increase the value of the business – over a period that typically lasts 3-7 years – before “exiting” (i.e. selling) the business, hopefully for a significant profit. 

Strategies typically employed to increase the value of businesses acquired include: improving operational efficiencies, cutting costs, improving synergies and economies of scale, driving greater revenue, divesting (i.e. selling or shutting down) non-core or less profitable elements of the businesses, improving discipline around capital and cash flow, and pursuing “buy and build” strategies (i.e. investing in “bolt-on” acquisitions whereby complementary businesses and/or competitors are acquired and integrated into a single corporate group, in the hope that the combined entity is more valuable than the sum of its individual parts). 

Venture capital

Like private equity firms, venture capital firms aggregate funds from institutional investors and private individuals, then aim to buy or invest in businesses and subsequently sell at a profit. However, venture capital firms tend to focus on earlier stage investee businesses (e.g. start-ups and scale-ups) and invest in small equity stakes, whereas private equity firms typically invest in more mature businesses and often invest in much larger stakes.