A Quick Guide to 5 Core Functions of Private Equity Professionals
Who leaves the well-heeled investment bankers feeling like pikers in comparison? Private Equity Professionals.
Private Equity (PE) Firms typically derive billions as investment capital from high-net-worth individuals and use it to acquire equity in private companies (in public firms as well with an aim to make them private and delist from stock exchanges). The idea of such an investment is to gain significant control of a company’s functions. This requires investors with deep pockets and PE professionals are the wizards who bring these money moguls to the table.
As per Investopedia, the minimum capital generally required by a Private Equity Firm to operate in the market is USD 250,000, and it can go well-above million dollars in case of big Private Equity Firms.
The question is, what do these PE professionals actually do? Here are five principal functions performed by PE professionals.
5 Core Functions of Private Equity Professionals
- Raise Funds — The Investment Club
Raising funds for investment is one of the principal functions of PE professionals. Much of the PE market functions on these funds. A private equity fund is like an investment club where investors comprising pension funds, investment funds, insurance companies, banks, funds-of-funds, and high net worth individuals, along with Private Equity Fund managers themselves, invest. This responsibility of bringing funds is typically undertaken by senior partners.
The cycle of raising funds generally commences every 4-5 years when close to ~70-80% of the funds collected in previous cycle have been invested.
- Source Investment Opportunities — Pinpointing Targets
The funds thus raised are then used to make investments, which requires sourcing and looking for potential target companies. This function is taken by mid to senior level management who reach out to the management of target firms, either by themselves or via a conduit such as an investment bank. The entire exercise demands substantial amount of efforts and resources on the part of a PE firm to execute smooth transactions and relationship management with potential companies.
For this purpose, many PE funds are increasingly focusing on specializing in specific sectors or geographies. As a result, their teams consist of Private Equity Professionals with a strong business knowledge of those potential target markets.
- Make Investment — The deal in action
This function is most commonly assumed by junior teams under the direct supervision of seniors. Having found the right investment opportunities, next comes working out the details of the deal to negotiate and structure investments. This involves drilling an attractive financial transaction to achieve objectives of multiple parties. This function requires skilled financial engineers and negotiators who can blend incentives with associated risks; and strategy consultants as well as lawyers.
- Augment Returns on Investments — Amplifying yields
Once an investment has been made, Private Equity Professionals use debt to augment returns by actively managing their investments. Although they are not involved in day-to-day operations of the business, they are involved in setting and monitoring strategies. The invested businesses are generally run for around two to five years before they are sold off. PE firms might have a separate ‘operations team’ for this function, or the team, which worked on the transaction, might be put in charge.
- Realize Returns on Investments — Winning the field
It’s time to reap the returns! The final function of PE fund managers is realizing the returns through selling or floating the investments at a profit. Most PE firms are adopting an exit horizon, meaning the investment is made with an understanding that it will be sold off or floated within a pre-decided timeframe. This function is usually managed by junior teams who facilitate selling of the businesses to another company, or another PE firm, or through an IPO.
Making a Private Equity Professional Career
Devin Mathews, a senior PE professional writes in the PE Hub Network that not too long ago, there were no ‘Associate’ level positions at PE funds but now thousands of associates are burning midnight oil finishing PE projects and thriving on huge money. The industry typically hires people with at last a few years of experience in investment banking, accounting, and the likes. Embarking a Private Equity Professional career means being thorough and smart. Getting a third-party validation to your knowledge and becoming certified, can help you battle the challenges and make a cut to the interviews at PE firms. United States Private Equity Council (USPEC) is one such body offering Chartered Private Equity Professional (CPEPTM) designation to aspiring professionals. You can opt for other finance and accounting certifications including CFA and IMA, among others.
Private Equity is big. Are you ready to riff through it?