Rambling About Private Equity

Today I thought I might ramble on about private equity funds for a short piece.

The first thing to know about private equity and private equity funds, is that they are not that private. Billions of dollars are invested in private equity funds all over the world. The qualifications to participate in a private equity fund are rather simple. You just need to have lots of money to invest. If you represent a large pool of money, say like a state employee pension fund, then the private equity funds come and visit you. But, private equity funds are not just for large pools of money like pension funds. Some wealthy individuals invest in private equity funds and some times their investments in them, make them even richer, but not always.

Some private equity funds are staffed with some really smart people with enough advanced degrees to fill up your arm. Other private equity funds are staffed by people that can not find their rear end with either arm. The challenge for the investor is to be able to sift through all the BS and select those funds with the best track records and the most competent people.

The best private equity funds have no problem raising money for a new fund. Investors, large and larger, are lined up waiting for these funds to take their money. Private equity funds with known track records make news in the financial press. They become like rock stars in their own little universe. Other, less well known or start up private equity funds hire marketing people to introduce them to the large pools of capital here in the United States and around the world. These marketing people can make a very nice living by being able to talk and inform potential investors about the joys of investing in a private equity fund.

Oh, I apologize, I have not even explained what a private equity fund is. I just assumed everyone would know. My experience with private equity funds is not all that old. Private equity funds invest in new ideas and new businesses. There are now many types of private equity funds and some are quite specialized in what kind of businesses they invest in. Silicon Valley was once the hot spot for private equity funds. There might still be a few out there, but private equity funds are now scattered all over the country and the world. Basically, before a corporation goes public, investors put seed money into a small start up company or even an idea for a product or service. These early investors then cash out when the company goes public or is sold to a large company. This process of cashing out is known as an exit strategy.

One thing about private equity funds is that they almost always have an exit strategy. Some private equity funds are better at the exit strategy part than others. Governments do not always have an exit strategy because they never want to cash out. In government work, cashing out ends the process of cashing-in. And, what politician wants to stop his constituents from cashing-in? For some companies, both publicly held and private, wars are a great way to cash-in. As a result, governments do not like to end the party of cashing-in by pulling the plug and cashing out.

Books and articles have been written about private equity funds. Some private equity funds have made huge profits for their investors and their staffs. I have a number of private equity stories about my adventures with the private equity side of the business, but I think I will save them for another time. If you are interested in learning more about private equity and private equity funds and how private equity enables new technologies and services to get the funding to get their start, just look up private equity on the Internet and I am sure you will find more information than you can read in a week. I do not want to leave people with the impression that private equity is bad. Private equity makes many new ideas a reality and helps create jobs and whole new industries. Private equity can be a force for good. Private equity also has another side to it too. Private equity funds have been used to destroy jobs and eliminate corporations. That is the downside of private equity. But, there has been more good to come from the creation of whole new industries as a result of private equity investing. Later.