Private Equity, when referred to as a type of investment, means the investment by a single party, whether an individual, or a company, in one or more business directly. This means that they purchase some stake in an enterprise, typically in its early stages, without going through a stock market or other exchange. Instead, investors of private equity are often sought after by entrepreneurs seeking additional funding for a business that they think will be successful. These entrepreneurs can then “pitch” the idea to the investor, or firm, who will then determine if, in their opinion, the venture is likely to be profitable enough to make the investment worthwhile. If the investor deems it worth the time, and money, he will put up some capital for the investment, in return for a pre-determined percentage of the enterprise, possibly a controlling interest, although the actual management is usually left to the original entrepreneurs – though carefully monitored by the investor.
This type of investing has an equal balance of risk and potential gain. As with any business, the potential is always there for the enterprise to fail. Similarly, the business could take off and both the entrepreneur(s), and the investor, could gain rapid wealth. Examples of such companies are Yahoo! ®, and Pay Pal ®, both of whom were funded by venture capitalists in a private equity set-up and progressed rapidly. In this manner, such investment can produce fantastic returns for the investor, and even if the enterprise does not take off as explosively as the examples above, can still turn a nice profit for the investor, particularly if he has invested in multiple enterprises.
As always, there is a risk of failure also. The company could fail due to a number of factors. These include (i) poor planning (ii) unexpected market influences, such as new competition (iii) insufficient initial capital (although the investor will likely put up more funds as necessary, where possible, to protect his initial investment) In the event of failure, the real loss may be to the entrepreneur but the investor involved could still lose a lot of money. While most investors would not invest more money, than they could safely afford to lose, in a third-party company, the loss could still have a significant effect on the investor’s business. For this reason, careful research is usually done before this type of investment.
Private Equity investments have the ability to create wealth rapidly when funds are invested into the right enterprise but such investments require the investor to have substantial financial resources, the knowledge to analyze a business plan to determine its potential for profitability, and the ability to wait, possibility extended, periods of time for returns on his investment. When these factors are not a problem, however, the possibilities are very bright for this type of investing.
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