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Hm. I have seen the phrase "private equity" a lot of times. I thought it meant "money that belongs to companies". But after skimming through https://en.wikip

Hm. I have seen the phrase "private equity" a lot of times. I thought it meant "money that belongs to companies". But after skimming through https://en.wikipedia.org/wiki/Private_equity https://en.wikipedia.org/wiki/Private_equity for ten seconds, I realize that I have no idea what "private equity" is. This is embarrassing, but experience has taught me that I have to push through these situations, where I suddenly realize that my ignorance on some topic is truly profound... I thought all companies above a certain size were publicly traded. ...Wait, do I have some incorrect definition of publicly traded? It means there is stock in the company for sale, right? What percentage (by count) of companies are publicly traded? By volume? If a large company isn't publicly traded, does that make it a private equity company?

joshjkim 10y ago
private equity specifically does mean stock that is not publicly traded. BUT (and I may be wrong here, so apologies if I am!) I think some of the confusion may be that the term "private equity" is more commonly/generally used to describe private equity funds and their investment strategies. In that case, private equity funds are essentially investment funds with a strategy something like this (and I'm trying to be as bland in description here as possible, as private equity fund strategies very often result in some unpopular results - ie. mass layoffs, selling for parts, etc.): purchase a controlling interest in a company (often times financing the purchase with debt acquired by the company they are purchasing), operate the company with a super focus on some sort of efficiency (usually profitability or revenue), and then re-sell the company 3-5 years later at a 2-5X return (ideally, of course sometime that doesn't happen). the reason they are called private equity funds is that in order to get a "controlling interest", PE funds almost always either target (1) smaller private (usually industrial) companies that are operated by their owners (my cousin works at a fund that focuses on oil-services companies that are private but have $100m+ in annual revenue) or (2) public companies that they think are undervalued by the market or poorly run that they can "take private" by purchasing all the stock and then running more efficiently (these are the big sexy PE deals, biggest recent example is: Dell - http://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/#1a00b6494fd2 http://www.forbes.com/sites/connieguglielmo/2013/10/30/you-w...) there's a WHOLE lot of other details that I won't get into on how PE funds work, and about how PE funds are now so massive that they almost act like unregulated banks and have a bunch of strategies other than the one I described above, but that's the traditional fund strategy (at least based on my experience) and I think a good place to start. Another good way to learn would be to learn more about the biggest PE funds themselves: KKR: https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts TPG: https://en.wikipedia.org/wiki/TPG_Capital https://en.wikipedia.org/wiki/TPG_Capital Silverlake: https://en.wikipedia.org/wiki/Silver_Lake_Partners https://en.wikipedia.org/wiki/Silver_Lake_Partners (work in tech a lot, did the skype deal where they bought from eBay and sold to MS) Another way to learn more might be learning how a leveraged buy out (LBO) works, as this is one of the more traditional PE fund financing strategies for their deals: http://www.investopedia.com/articles/financial-theory/08/leveraged-buyouts.asp http://www.investopedia.com/articles/financial-theory/08/lev... If you really get into it, the book "Barbarians at the Gate" is considered a classic book written by two WSJ journalists about KKR's takeover of RJR Nabisco, the largest PE deal in history ($25b in 1988), I enjoyed it!
- sportanova 10y ago
  "They also face fewer regulations than banks". Because they're not banks..
bllguo 10y ago
> I thought all companies above a certain size were publicly traded. ...Wait, do I have some incorrect definition of publicly traded? Size doesn't really matter. I suppose you could say size and public status are correlated. Companies who are publicly traded have gone through an IPO and their shares are available for purchase at stock exchanges. For instance Uber is large but not publicly traded. If a large company isn't publicly traded it is a private company. I don't think "private equity company" is a term in wide use, but a private company has private equity that is available for VC and private equity firms to invest in. As a HN user you may be familiar with how VCs work? VC can be thought of as a subsection of the PE industry.
- daveloyall 10y ago
  > a private company has private equity So a VC, an investor... can buy a share of the private company? And then as the value of the private company grows, so does the value of the VC's share? If there isn't a public market for such shares, then how does the VC sell the share?
  - frankydp 10y ago
    Usually in a liquidity event. IPO or sale of the company.
    - mbesto 10y ago
      Yup. Or more generally known as M&A which could be a buyout (LBO from a PE firm), bigger company acquisition, merger, IPO, or selling shares to another investor.
tvanantwerp 10y ago
Publicly traded companies are ones where stock is bought and sold on an exchange, such as the NYSE or Nasdaq. Basically anyone with money can find a broker and buy/sell shares of publicly traded companies. Private firms do not list on public exchanges and their shares aren't available for purchase or sale to just anyone. Many of the more recent unicorns, such as Uber, are currently private. The size of a company does not determine whether it is public or private. Becoming public means submitted lots of paperwork to the SEC and getting an investment bank to underwrite the sale of your shares on a public exchange. All comes down to whether or not the private owners care to go through that process. Private equity usually refers to investment firms who specialize in buying shares in non-publicly traded companies. Angel investors and venture capitalists can broadly be included under this label.
mbesto 10y ago
PE money is no different from VC money in that it is an investment in private companies. The biggest difference is that PE firms usually have a majority stake in the business they invest in (usually 51% or more) and effectively means they "own" the company. For VC, it's almost entirely a minority stake (at most maybe 30%). Most PE firms do what's called a Leverage Buyout (LBO) which means companies are bought like houses with a significant chunk of the capital provided for by investment banks. So, let's say Acme Co (made up company) is bought by a PE firm for $100M and now the PE firm owns 51% of Acme. The PE firm usually puts in (let's say) $20M from it's own fund and an investment bank puts in $80M. In 5-7 years the PE firms sells the company for $200M. They pay back the remainder of their loan of $80M to the investment bank (plus interest and some would have already been paid back by profits) and then they get a return on their investment in the form of carry. PE follows a similar business model as VC using it's 2-and-20 rule on their returns (2% management fees + 20% carry).
anonbanker 10y ago
You're off on a few details, but mostly on the right track. You need to do a bit light reading: Start with legal-dictionary's definition of Equity[0] and Authority[1], and Agency[2]. That gets you the answer on where the authority to issue certificates of any sort comes from. Then apply those entire pages to private ownership. Documents for private corporations are drafted in private, using private authorities, unlike public corporations registered with a state. they can issue shares privately, as well, provided they have an underwriter. Property ownership (or rather, those entities that own the property) is King in this new economy. Many (All?) YCombinator companies use Delaware as their authority. (We could apply all of the above to how Corporations are now Persons, but that's a rabbit-hole). Bottom Line: everyone should incorporate. become a private equity firm. 0. http://legal-dictionary.thefreedictionary.com/Equity http://legal-dictionary.thefreedictionary.com/Equity 1.http://legal-dictionary.thefreedictionary.com/authority http://legal-dictionary.thefreedictionary.com/authority 2.http://legal-dictionary.thefreedictionary.com/agency http://legal-dictionary.thefreedictionary.com/agency

joshjkim 10y ago

private equity specifically does mean stock that is not publicly traded. BUT (and I may be wrong here, so apologies if I am!) I think some of the confusion may be that the term "private equity" is more commonly/generally used to describe private equity funds and their investment strategies. In that case, private equity funds are essentially investment funds with a strategy something like this (and I'm trying to be as bland in description here as possible, as private equity fund strategies very often result in some unpopular results - ie. mass layoffs, selling for parts, etc.): purchase a controlling interest in a company (often times financing the purchase with debt acquired by the company they are purchasing), operate the company with a super focus on some sort of efficiency (usually profitability or revenue), and then re-sell the company 3-5 years later at a 2-5X return (ideally, of course sometime that doesn't happen). the reason they are called private equity funds is that in order to get a "controlling interest", PE funds almost always either target (1) smaller private (usually industrial) companies that are operated by their owners (my cousin works at a fund that focuses on oil-services companies that are private but have $100m+ in annual revenue) or (2) public companies that they think are undervalued by the market or poorly run that they can "take private" by purchasing all the stock and then running more efficiently (these are the big sexy PE deals, biggest recent example is: Dell - http://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/#1a00b6494fd2 http://www.forbes.com/sites/connieguglielmo/2013/10/30/you-w...) there's a WHOLE lot of other details that I won't get into on how PE funds work, and about how PE funds are now so massive that they almost act like unregulated banks and have a bunch of strategies other than the one I described above, but that's the traditional fund strategy (at least based on my experience) and I think a good place to start. Another good way to learn would be to learn more about the biggest PE funds themselves: KKR: https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts TPG: https://en.wikipedia.org/wiki/TPG_Capital https://en.wikipedia.org/wiki/TPG_Capital Silverlake: https://en.wikipedia.org/wiki/Silver_Lake_Partners https://en.wikipedia.org/wiki/Silver_Lake_Partners (work in tech a lot, did the skype deal where they bought from eBay and sold to MS) Another way to learn more might be learning how a leveraged buy out (LBO) works, as this is one of the more traditional PE fund financing strategies for their deals: http://www.investopedia.com/articles/financial-theory/08/leveraged-buyouts.asp http://www.investopedia.com/articles/financial-theory/08/lev... If you really get into it, the book "Barbarians at the Gate" is considered a classic book written by two WSJ journalists about KKR's takeover of RJR Nabisco, the largest PE deal in history ($25b in 1988), I enjoyed it!

sportanova 10y ago
"They also face fewer regulations than banks". Because they're not banks..

bllguo 10y ago

> I thought all companies above a certain size were publicly traded. ...Wait, do I have some incorrect definition of publicly traded? Size doesn't really matter. I suppose you could say size and public status are correlated. Companies who are publicly traded have gone through an IPO and their shares are available for purchase at stock exchanges. For instance Uber is large but not publicly traded. If a large company isn't publicly traded it is a private company. I don't think "private equity company" is a term in wide use, but a private company has private equity that is available for VC and private equity firms to invest in. As a HN user you may be familiar with how VCs work? VC can be thought of as a subsection of the PE industry.

daveloyall 10y ago
> a private company has private equity So a VC, an investor... can buy a share of the private company? And then as the value of the private company grows, so does the value of the VC's share? If there isn't a public market for such shares, then how does the VC sell the share?
- frankydp 10y ago
  Usually in a liquidity event. IPO or sale of the company.
  - mbesto 10y ago
    Yup. Or more generally known as M&A which could be a buyout (LBO from a PE firm), bigger company acquisition, merger, IPO, or selling shares to another investor.

tvanantwerp 10y ago

Publicly traded companies are ones where stock is bought and sold on an exchange, such as the NYSE or Nasdaq. Basically anyone with money can find a broker and buy/sell shares of publicly traded companies. Private firms do not list on public exchanges and their shares aren't available for purchase or sale to just anyone. Many of the more recent unicorns, such as Uber, are currently private. The size of a company does not determine whether it is public or private. Becoming public means submitted lots of paperwork to the SEC and getting an investment bank to underwrite the sale of your shares on a public exchange. All comes down to whether or not the private owners care to go through that process. Private equity usually refers to investment firms who specialize in buying shares in non-publicly traded companies. Angel investors and venture capitalists can broadly be included under this label.

mbesto 10y ago

PE money is no different from VC money in that it is an investment in private companies. The biggest difference is that PE firms usually have a majority stake in the business they invest in (usually 51% or more) and effectively means they "own" the company. For VC, it's almost entirely a minority stake (at most maybe 30%). Most PE firms do what's called a Leverage Buyout (LBO) which means companies are bought like houses with a significant chunk of the capital provided for by investment banks. So, let's say Acme Co (made up company) is bought by a PE firm for $100M and now the PE firm owns 51% of Acme. The PE firm usually puts in (let's say) $20M from it's own fund and an investment bank puts in $80M. In 5-7 years the PE firms sells the company for $200M. They pay back the remainder of their loan of $80M to the investment bank (plus interest and some would have already been paid back by profits) and then they get a return on their investment in the form of carry. PE follows a similar business model as VC using it's 2-and-20 rule on their returns (2% management fees + 20% carry).

anonbanker 10y ago

You're off on a few details, but mostly on the right track. You need to do a bit light reading: Start with legal-dictionary's definition of Equity[0] and Authority[1], and Agency[2]. That gets you the answer on where the authority to issue certificates of any sort comes from. Then apply those entire pages to private ownership. Documents for private corporations are drafted in private, using private authorities, unlike public corporations registered with a state. they can issue shares privately, as well, provided they have an underwriter. Property ownership (or rather, those entities that own the property) is King in this new economy. Many (All?) YCombinator companies use Delaware as their authority. (We could apply all of the above to how Corporations are now Persons, but that's a rabbit-hole). Bottom Line: everyone should incorporate. become a private equity firm. 0. http://legal-dictionary.thefreedictionary.com/Equity http://legal-dictionary.thefreedictionary.com/Equity 1.http://legal-dictionary.thefreedictionary.com/authority http://legal-dictionary.thefreedictionary.com/authority 2.http://legal-dictionary.thefreedictionary.com/agency http://legal-dictionary.thefreedictionary.com/agency