The World of Private Equity Portfolio Companies

Private equity portfolio companies are a unique breed, with their own set of characteristics and challenges. They're often acquired by private equity firms to turn them around, improve their operations, and increase their value.

A typical private equity portfolio company has a debt-to-equity ratio of around 3:1, meaning they have three dollars of debt for every one dollar of equity. This can put a strain on the company's finances.

Private equity firms often focus on companies with strong cash flows, as these can be used to pay off debt and generate returns. Companies with stable revenue streams and predictable cash flows are particularly attractive.

Private equity firms typically hold onto their portfolio companies for around 4-7 years, during which time they'll work to improve operations, reduce costs, and increase revenue. The goal is to create a more valuable company that can be sold for a profit.

Private equity is a type of investment that involves buying and managing companies with the goal of selling them for a profit.

These investment partnerships are typically run by private equity firms on behalf of institutional and accredited investors, who commit significant capital for years.

Private equity firms may acquire entire companies, either private or public, or invest in buyouts as part of a consortium.

They usually don't hold stakes in companies that remain listed on a stock exchange, which means they aim to take companies private.

Investors in private equity are often required to be institutions or individuals with high net worth, due to the significant capital commitment involved.

Private equity firms can acquire companies through various deal types. The buyout remains a staple, where a firm buys an entire company to cut costs and restructure operations.

A carve-out is another type of acquisition, where a private equity investor buys a division of a larger company. This can be a non-core business put up for sale by its parent corporation, often at a lower valuation multiple.

Secondary buyouts, where a private equity firm buys a company from another private equity group, have become more common due to increased specialization by firms. This type of deal can be complex and riskier, but can also provide a platform for acquiring complementary businesses.

Private equity firms invest in mature companies, not startups, and their goal is to increase the company's worth or extract value before exiting the investment.

The private equity industry has grown rapidly, with private equity buyouts totaling $654 billion in 2022, the second-best performance in history.

Private equity firms raise client capital to launch private equity funds, and they operate them as general partners, managing fund investments in exchange for fees and a share of profits above a preset minimum known as the hurdle rate.

Private equity funds have a finite term of 10 to 12 years, and the money invested in them isn't available for subsequent withdrawals.

The average holding period for a private equity portfolio company was about 5.6 years in 2023.

Several large private equity firms are now publicly listed companies, including Blackstone Group Inc., KKR & Co. Inc., Carlyle Group Inc., and Apollo Global Management Inc.

Private equity firms make deals to buy and sell their portfolio companies, which can be categorized into different types based on their circumstances.

The buyout is a staple of private equity deals, involving the acquisition of an entire company, whether public, closely held, or privately owned. This can be a cost-cutting measure for underperforming public companies.

Carve-outs are another type of private equity acquisition, where investors buy a division of a larger company, often a non-core business put up for sale by its parent corporation. For instance, Carlyle acquired Tyco Fire & Security Services Korea Co. Ltd. from Tyco International Ltd. in 2014.

Secondary buyouts involve a private equity firm buying a company from another private equity group, which was once considered a distress sale but has become more common. This can be a strategic move to cut costs and sell to another PE partnership.

Private equity firms also use the sale of a portfolio company to one of its competitors as an exit strategy, or it can be sold through an initial public offering (IPO).

The history of private equity investments is a fascinating story that dates back to 1901, when J.P. Morgan bought Carnegie Steel Corp. for $480 million, creating U.S. Steel in one of the earliest corporate buyouts.

This deal was massive, considering the size of the market and economy at the time. J.P. Morgan's investment paved the way for future private equity deals.

Henry Ford made headlines in 1919 by using borrowed money to buy out his partners, who had sued him after he slashed dividends to build a new auto plant.

The largest leveraged buyout in history, adjusted for inflation, was engineered by KKR in 1989, when they bought RJR Nabisco for $25 billion.