Private Equity Funds - Entrepreneurial Sustainability, Entrepreneurship & Small Businesses Video Lecture | Entrepreneurship & Small Businesses - B Com

private-equity refers to company
ownership by a specialized investment
firm typically a private equity firm
will establish a fund and use it to buy
multiple businesses with the goal of
selling each one within a few years at a
profit this differs from publicly held
businesses where stock is listed on an
exchange and owned by a relatively large
number of people private equity firms
will often target an underperforming
business and after purchasing the
company use their management expertise
to improve profitability despite its
lack of profit Starlite partners a
private equity firm believes that fun
toys will be a strong acquisition
candidate because of strong demand for
its products after verifying the
company's financial records it decides
to acquire the family-owned business for
twenty million dollars Starlite Partners
contributes five million dollars toward
the purchase and raises another five
million from institutional investors
that include pension funds endowments
and insurance companies it gets the
remaining ten million dollars in the
form of loans from commercial banks for
its fund starlight charges a management
fee of two percent of the total capital
it is raised giving an income of
$400,000 per year in this case starlight
generates additional money when it sells
the business to a large toy marketer
five years later by replacing the fun
toys management team and implementing a
state of the art supply chain technology
the company's market value increases to
twenty five million dollars under the
bonds covenant starlight has a right to
20% of the five million dollar capital
gain from the sale in total the
investment firm has earned two million
dollars from management fees and 1
million dollars from the sale one
criticism of private equity is that
investment firms can garner substantial
income even when the target company
continues to struggle however buyout
firms can also point to a number of
success stories in which they help turn
a troubled business into a consistently
profitable organization
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