Do PE firms function like investors

Private Equity
New answer on Jun 29, 2021
5 Answers
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Anonymous A asked on Jun 29, 2021

Do PE firms basically do the same things as investors - they invest $ into a company and provide advice with the expectation of getting higher returns?

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Francesco
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replied on Jun 29, 2021
#1 Coach for Sessions (4.000+) | 1.500+ 5-Star Reviews | Proven Success (➡ InterviewOffers.com) | Ex BCG | 9Y+ Coaching

Hi there,

PE firms are technically investors, but they don’t act as investors such as angels or VC funds:

  1. They take control of the company, while angels/VC normally have a minority position
  2. They invest in mature sectors
  3. They usually do acquisition using debt
  4. They often change the management/restructure the business

Best,

Francesco

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Henning
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replied on Jun 29, 2021
Bain | passed >15 MBB interviews as a candidate

Well, first of all PE firms are investors. Though there is a specific characteristic that makes them a special form of investors: Unlike other forms of investors, they take over the management (incl or excl the original management team) and actually improve the operations. To do so, they will typically install management personnel that is well aligned wtih them and has a consulting or PE background to make difficult decisions.

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Ian
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replied on Jun 29, 2021
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

I would take it much further than just" advice". If you invest, you get a voting share of the company. If a PE firm invests, it owns the company. Therefore, it makes any changes necessary to get maximium value/returns out of the acquired company.

PE firms (particularly in a case) will buy a company for any of the following reasons:

  1. The firm is undervalued (we see value that the market doesn't). Translation: Home flipping
  2. The firm has huge potential if we just change a few things. We'll buy it, fix it, and sell it (this is where their expertise may come in).  Translation: The home is a fixer-upper
  3. The firm's parts are greater than it's whole. Well buy it and carve it out (1+1 = 1). Translation. Buy a plot of land and subdivide.
  4. Multiple firm's together are worth more than apart. We'll buy them and combine them (1+1=3). Translation: Buy a few plots of land and build a megadevelopment.
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Antonello
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replied on Jun 29, 2021
McKinsey | MBA professor for consulting interviews

Hi, differently from classical investors they usually take control of the company, or at least they place many new managers on the company board. With consulting support, new investments and synergies across other firms in the portfolio, they usually boost the company value in 3-5y

Best,
Antonello

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Ken
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replied on Jun 29, 2021
Ex-McKinsey final round interviewer | Executive Coach

Private equity is a very broad space by definition which would go from VC to large cap PE. The "advice" or leverage that the investor has can really vary from buyouts where the investor has majority stake to make management decisions, to minority stake where the investor may or may not have a board seat. 

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Francesco gave the best answer

Francesco

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