Private equity explained

Private equity is a way of owning and investing in private companies.

Private equity funds can invest in companies that are already privately-owned, perhaps by a family or entrepreneur; they can acquire businesses that exist as divisions or subsidiaries of larger companies, or they can acquire publicly-listed companies and take them private.

The private equity ownership model allows a professional team of fund managers to take large stakes in private companies, to ensure they are run in the best interests of the underlying investors.

This avoids the 'agency' problem of a dislocation between the owners of assets and how they are managed.

For instance, for stock market-listed companies to run effectively, management-stewards have a large degree of control over how the company is run, with reference to widely dispersed shareholders.Read more on this.

In state-controlled businesses, the dislocation to the ultimate owners, the taxpayer, is even wider. Other forms of company ownership, such as family companies, do not enable outside investors to access their returns.

The private equity ownership model can be applied to a wide range of company types, sizes, sectors and geographies.

The common factor is that all investee companies have unrealised potential. Private equity investment will aim to unlock this potential.