Private equity firms are known for their ability to dramatically increase the value of their investments. This is made possible by their aggressive use of debt, which provides financing and tax benefits. Additionally, these firms focus on improving cash flow and margins. The firms’ focus on these areas is often unfettered by the restrictions of a public company’s boards of directors.
Private equity funds typically charge investors a high amount of fees. These firms can charge as much as 20% of the profits they generate. Fees can be based on performance, and general partners and fund managers are paid performance fees. Typically, private equity funds charge investors a “2 and 20” annual fee structure, meaning that investors are charged 2% of the assets managed and 20% of the profits they generate. Investors should also be aware that private equity investments are high risk.
Taking a public company private is a great way to improve the company’s performance, but it also presents new challenges. This process requires substantial changes in management, and tests the abilities of the private equity firm. For example, when KKR and GS Capital Partners took the Wincor Nixdorf unit from Siemens, the company’s management worked with the private equity firm and followed its plan. Private equity firms may also have to replace top management teams, which means they need to come up with a new strategy.
Private equity firms develop know-how very quickly. For example, the largest private equity fund in Europe, Permira, has made 30 substantial acquisitions and 20 successful disposals of independent businesses. Most public companies do not develop such depth of experience.