PE 101

How do PE firms make money? There are really just three main ways: fees, carried interest and dividend recaps. Let us explain.

Sovereign wealth funds represent around $8 trillion in assets under management. That’s more than the world’s hedge funds. That’s more than private equity. But how do they manage all that cash?

Emerging market countries may well represent the greatest opportunity for growth in the private equity industry over the coming years, and in fact, weve already seen PE investing in developing countries expand since the financial crisis.

As part of the PitchBook Knowledge Center, we have defined and explained some of the characteristics of growth deals in private equity.

In the larger scheme of private equity investing, growth equity generally takes a back seat to buyouts, particularly larger ones, which receive most of the press and generally set the tone for how the industry is covered in the news media.

Casual observers often lump private equity (PE) in with the rest of Wall Street, particularly hedge funds and investment banks. In reality, the PE industry differs significantly from the rest of Wall Street, and from the rest of the economy in general. No one really does what PE does.

When private equity was coming of age, the use of leverage and financial engineering was often more than enough to drive returns.

Secondary buyouts occur when private equity (PE) firms sell control of a portfolio company to another PE firm. The transaction seems simple at a glance, but there are several implications tied to this particular kind of deal, both on the buy side and sell side.

Before exiting a portfolio company, many private equity firms opt to generate pre-sale returns on their investments through transactions known as dividend recapitalizations. In short, companies that undergo dividend recaps incur additional debt on their balance sheets in order to pay one-time dividends to their shareholders, chiefly their PE sponsors and often their management teams.

The limited partnership serves as the most common legal structure for private equity funds.

Private equity (PE) firms have been characterized as many things, and while each firm will have its own distinctive investment approach and philosophy, they all share a common goal: creating value for their investors.