Private equity firms invest in non-public companies and typically hold their investments with the intent of realizing a return within 3 to 7 years. Generally, investments are realized through an initial public offering, sale, merger, or recapitalization.

Private equity groups tend to focus on more mature businesses, often contributing both equity and debt (or some hybrid) to the transaction.

What do private equity firms look for in a potential acquisition?

CREATING VALUE
While private equity firms employ various strategies to create value in their investments (such as the consolidation of a fragmented industry), a common strategy is to acquire a "platform" company and grow the platform through further "add-on" acquisitions. Add-on acquisitions are typically smaller in size, but complementary to, the platform investment.

LEVERAGE AND CASH FLOW
Private equity groups typically use leverage (debt) to increase the return on the firm's invested capital. The amount of leverage employed is normally determined by the target's ability to service the debt with cash generated through operations.

EXIT
Private equity groups make money from both the cash flow of the acquired business and from the proceeds generated upon exiting the business. The exit provides the investor a mechanism to monetize the firm's equity. The exit provides the financial sponsor with a finalization of the investment and an opportunity to distribute profits. In fact, a significant component of a private equity professional's compensation is based on this profit distribution, called "carried interest".

Action Steps
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Tips & Tactics
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