Private equity investment firms are currently the most popular, sought-after type of capital management group in modern finance. Ever since the 1970s, private equity – this term simply refers to the non-public ownership of companies – has risen dramatically in popularity. Most private equity transactions are simply leveraged buyouts, or instances in which groups of investors secure sufficient financing to purchase companies, though they’re simply branded under the sexy umbrella of “private equity.”
Here is how private equity transactions work
Public shares of company stock that are traded on big financial instrument exchanges like the New York Stock Exchange and the NASDAQ have tons of financial information about them spread all around the world of finance. Financial statements inform interested parties – investors, current shareholders, and creditors, among others – of companies’ relative performance when compared to industry standards and other companies. Analysts across financial news media outlets put their experience and complex mathematical methods of reasoning to the test regularly to help the general public gauge whether such companies’ shares are solid choices to invest in. Further, the historical performance of public stock can provide investors with solid gauges to determine what the future price of such companies’ shares might be.
When these three methods are combined together, investors have plenty of information to make reasonable estimations, projections, and guesses as to whether they should purchase such financial instruments or not.
Investing money in private companies is far, far different than simply purchasing stock shares in public companies as mentioned above. Investors – particularly private equity investment firms – can’t use news media outlets’ advice regarding the potential performance of such investments because it simply doesn’t exist. Public shares aren’t sold by private companies, meaning these investment firms are unable to look up past performance of shares on historical price charts. Further, because reliable financial statements are available, how can investors compare private companies’ performance against other similar businesses and broad industries’ past financial accomplishments?
That’s why due diligence is a must-have in private equity
The investors above who sought out public shares of big companies exercise due diligence in determining whether various investments are suitable for not. Private equity investment firms, on the other hand, must try many times harder than investors purchasing things like bonds, stocks, and put options to make sure the companies they purchase equity in are worth their time and money.
When a firm like Corporate Resolutions performs private equity due diligence, in this case, it includes things like triple-checking all line items on financial statements such companies issue privately, interviewing clients to determine if what assertions companies make are true, and certifying all non-financial metrics available. If private equity investment firms don’t bother with pouring all of their collective effort into such job duties, investors will leave – some of them will never come back to those investment firms they initially trusted.
Private equity is a big field of investing. Thanks to the particular unavailability of certified information about the companies they buy, due diligence is of utmost importance.