In its broadest sense, private equity is an ownership interest in a company or portion of a company that is not publicly owned, quoted or traded on a stock exchange.

In financial terms, private equity generally refers to equity-related finance designed to bring about positive change in a company, such as:

• Growing a new business
• Bringing about operational change
• Financing an acquisition
• Taking a public company private

Because private equity returns are achieved through operational improvements and financial restructuring, the experience and leadership ability of the private equity manager are paramount.

Public Equity:

• Public information
• Passive investors
• Quarterly earnings focus
• Traditional incentive structures (options, restricted stock grants)

Private Equity:

• Use private information to reach decision
• Investors as operators
• Multi-year strategic planning
• Ability to retain entrepreneurs and attract skilled managers through equity participation

Private equity investments span all stages of a company’s life cycle.

• Venture capital. Seed money and funding for start-up and early-stage companies.
• Development, expansion or growth capital. An investment to help mature companies bring a new product to market, invest in a new plant or acquire a company.
• Buyout capital. Funding used to purchase an existing company or one of its divisions.
• Mezzanine (subordinated) debt. Debt financing used in a buyout.
• Restructuring capital. Capital infusion for distressed companies undergoing financial or operational reorganization.

When a firm invests in a company, they do so because they believe they can enhance the value of the asset. For Growth Equity firms in particular, often times, they are targeting middle-market companies that have expanded as far as their current resources and management team can take them. For these companies, teaming with a Private Equity firm provides access not only to capital but also a wealth of invaluable resources, such as operational executives, industry experts, new suppliers, economies of scale and access to new markets. A private equity sponsor can leverage its extensive network to improve management, logistics, infrastructure and other essential components of a business that can take years to develop separately.

A “60/40” allocation to stocks and bonds may no longer be enough to provide investors with the returns and diversification needed to achieve their long-term goals. When screened for correlation to other parts of a portfolio, alternatives such as private market investments may help lower volatility, enhance returns and broaden diversification.