How does the private equity business work

This is how the private equity business works

"See us as consultants," says Max-Burger Calderon, partner at Apax, explaining the private equity model to potential clients: "Instead of a fee, we get the right to invest. And that's not exactly cheap." To put it more soberly: Investment companies provide non-listed companies with equity that they usually have previously collected from pension funds and wealthy private individuals. Some of them are also financed through so-called mezzanine funds from investment banks. For example, Goldman Sachs recently launched the largest fund of its kind to date, worth $ 2.7 billion.

The size of the funds with which the private equity companies go on a shopping spree is between two and five billion euros in Europe. The size of the individual investments is extremely different: While some investment companies also invest smaller double-digit million amounts in family businesses, others specialize in "jumbos" from one billion euros.

The aim of the holding companies is always the same: the value of the company bought up should be increased and the respective company should then be sold again - usually after three to eight years. The way to this goal is mostly similar: The private equity investors aim to increase the cash flow (free inflow of funds) in order to reduce possibly existing debts.

While the takeover of mostly ailing companies ("turnaround investment") was originally the focus of financial investors, at the turn of the millennium the allocation of venture capital for start-ups was particularly popular in the New Economy. After the Internet bubble burst, private equity companies have increasingly specialized in what is known as the growth financing of existing companies.

Another change: While financial investors used to often change board members, strong management is now often one of the basic requirements for entry. In contrast to strategic investors, according to Apax partner Burger, the investment company only makes one decision, namely: "Who runs the company? The management controls the process." But only up to a point. "If things go wrong, we're deep inside," says Heiner Rutt from the Carlyle Group. "They are not known as softies," says Teneovis boss David Winn of his parent company KKR. "You are tough, but fair." In some cases also because the private equity firms often participate in management buyouts and the managing directors can also have a say as shareholders.