Private equity is a financial activity in which an investor (generally an institutional investor) buys a stake in a target company. This may be done by purchasing newly issued shares or buying existing shares from third parties.

In short, private equity provides new funds to private companies (i.e. those not listed on a stock market).

How do private equity funds work?

Private equity funds, such as Tendercapital Alternative II, are established for a pre-defined period (generally between 5 and 30 years, or 10-12 years on average). During its lifetime, the fund invests in target companies, in accordance with diversification and risk mitigation principles. The lifetime of a private equity fund has distinct phases, from the initial investment through to the disinvestment or exit. The goal is to manage and develop investee companies with the aim of increasing their value.

(To find out more about the Tendercapital funds that invest in private equity, click here).

What are the different types of private equity?

There are several different types of private equity:

• Seed capital or angel investing: funds that invest in start-ups or companies that have yet to generate sales
• Venture capital: funds that invest in existing companies with negative cash flow but significant growth potential
• Development capital: funds that invest in existing companies with positive cash flow
• Management buyouts: funds where a company is acquired by its own management team (MBO)
• Management buy-ins: funds where the target company is acquired by an external management team (MBI)
• Buy-in management buyouts: funds where a company is acquired by a mix of its own management and external managers (BIMBO)
• Special situation or turnaround funds: funds that invest in failing companies