The Private Equity Cycle

Fundraising, Investment, Exit

A private equity firm manages pools of capital, generally referred to ‘funds’, that are raised from global or regional institutional investors or Limited Partners (LPs). Types of institutional investors include banks, pension funds and insurance companies.

The private equity firms makes investments from its fund, taking shareholdings in unlisted companies, with the aim of growing the business and hence increasing the value of its shares.

The period of time in which a private equity firm owns a business (holding period) varies according to the strategy of the private equity investor, the nature of the investee company and economic climate, but traditionally, holding periods have been between three-to-five years.

When it feels the time is right, the private equity firm must look to sell the investee company and, if it has handled the investment well, sell it for a profit. This will generate a return on investment (ROI) for the private equity firm, and in turn a proportion of these profits will be returned to the LP.

A healthy return for the private equity investor will lead to a healthy return for the institutional investor, which will provide a good incentive for the LP to make further commitments to future funds managed by that private equity house.

To find out more:
Investment
Fundraising
Exit