What is Private Equity?

Private equity has a vital role to play in funding UK companies but the sector is often misunderstood by investors

James Gard 27 January, 2021 | 11:37AM
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Private equity (PE) is a key part in the life of some of Britain’s biggest and well-known companies, but despite being a well-used phrase the industry is often misunderstood by investors.  How does it work? We look at five key questions.

What is Private Equity?

Private equity firms provide funding and expertise to allow a company to expand or restructure. A company may not be able to raise this money through traditional means such as bank loans, or by issuing shares on the market. Often a company is too risky so it needs early backers to foot the bill who hope to be rewarded later down the line. PE doesn’t wave a blank cheque book, though, as it is providing funding for a controlling interest in the company, trading expertise and funding for equity. “Fast-growing companies that are not publicly traded give professional investors equity in exchange for the funding and mentoring they need to continue growing,” says Pitchbook, a data and research company owned by Morningstar. That's a key aspect of how PE works: providing funding and the technical skills to turn a poor performing or early-stage firm into a successful one.

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James Gard  is content editor for Morningstar.co.uk


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