While the term investor generally brings to mind individuals who trade on public exchanges like the New York Stock Exchange and the Nasdaq, that’s not the only option. There’s a thriving market for investment in businesses that – for whatever reason – aren’t listed on a public exchange. It can be a lucrative career, but the specifics of what a private equity investor does are often not that well understood.
There are four general tasks that a private equity investor undertakes, but perhaps the most important is the acquisition of money. These investors serve essentially as middlemen for private companies, helping them get the cash they need to thrive. While investors often contribute some of their own money to these funds, the majority of cash typically comes from financial institutions. These institutions could constitute anything from retirement or pension funds to insurance companies or financially endowed individuals.
Investors also work on determining what businesses could be worthwhile acquisitions and guide the closing process. This typically requires a deep understanding of the field wherein the investor gets to know the particulars of the private business in question, evaluates their worth, and then does the heavy lifting of seeking out investors in the form of personal networks or investment banks. This can be a labor-intensive task since it requires investors to carefully investigate every angle of the deal and ensure the solvency of the buyout for the sake of their partners.
Following that, investors tend to have some control over the operations of businesses in their portfolio. While they won’t be on the ground level for day to day operations, they often take a top-down view of the business by cutting costs, changing management, and tightening operations. The amount of control that investors have on overall operations can vary wildly and is usually contingent on how large their stakes in the company are. They’re also beholden to providing reports to their shared investors in the portfolio company.
But ultimately, private equity investors are looking to find success with their portfolio companies and then divest with a profit. Investors will typically hold on to their investment for three to seven years, slowly nurturing the growth of the company and then selling the companies, earning a sizable return for themselves and their partners.