Private equity investment

Funding is easily one of the most important elements of a business. Without enough cash on the books, a company can’t do business—and eventually, it will cease to exist. And for many mature businesses that need a boost of funding, private equity is a natural solution.

The Role of Private Equity

Whereas venture capital firms typically fund start-ups, helping them to create a business, private equity firms typically invest in existing companies that are unprofitable or under-profitable, reorganizing them to increase their revenue and improve overall financial performance. Private equity can help save companies from bankruptcy, and instead turn them into profitable enterprises. As Victor Hwang put it in Forbes, private equity firms look to create “top-down optimization.”

Traditionally, the private equity business model underlying the relationship between General Partners (GPs) and Limited Partners (LPs) has remained consistent through the years. Today, though, that model is experiencing a renaissance.

Innovative Private Equity Models

Recent challenges in raising new funds and the downward pressure on returns have resulted in innovative new private equity models between GPs and LPs. The following are a few of these new experimental arrangements, as outlined by Bain & Company in Forbes:

Side Accounts - Some GPs are setting up side accounts that the GPs manage for larger LPs for a reduced fee. For the GP, it’s an opportunity to manage larger, longer-term capital commitments, while for the LP it’s an opportunity to work more closely with the GP at a reduced rate.

Outright Buyouts – Another innovative model now occurring is the outright buyout of a fund’s assets by a single LP. The investment can give a stagnant fund a new lease on life and allow the fund to take a longer-term approach to nurturing the portfolio companies.

Core Private Equity Investing – The Atlas Partners, a GP, coined the phrase “Core Private Equity Investing,” representing an innovative approach to PE that aims to provide more value to LPs. The idea is for the GP to select companies with business models with high barriers to entry, with less financing leverage and lower fees. LPs correspondingly get the benefits of investing with lower risk.

Private equity has a history of helping to turn around troubled companies. This practice will continue into the future, but increasingly will take on new, evolving structures and forms.