Most companies in the Netherlands are owned by entrepreneurs, a small proportion are owned by the public - the stock market - and a growing number of companies are owned by private equity firms. This piques the interest of investors, but what exactly do private equity firms do?
Setting up funds
As a rule, private equity houses set up a fund by raising money from large investors, such as pension funds and wealthy families. Then, they take this 'bag of money' to the market to take stakes in companies. The funds have a certain duration. At the end of the term, the companies are sold and the fund pays out the proceeds of the fund in proportion to the investment.
What is important to note, is that the task of PE funds is not focused solely on realising profits from their portfolio companies. Obviously, it is important that the companies in the funds are profitable and if so, the profits naturally flow to the funds - they are shareholders, after all - but the underlying value of the companies is perhaps even more important. After all, the interests are only held for the duration of the fund and then sold: the difference between the purchase and sale price of the company is a way of creating value for the investors.
Adding value
Value can be added to a business in many ways. The simplest way is to grow the company naturally by improving its processes, for instance by automating processes or increasing sales and marketing. The second way is by growing the business by linking it with other similar or complementary businesses: this process is known as 'buy-and-build'. Finally, a private equity firm can often raise debt to acquire and grow the company - this is called leverage.
The people managing the fund usually make their money in two ways. Firstly, a percentage of the initial deposit goes to the partnership, as a kind of administrative fee. Secondly, the fund keeps a share of the profits made over the life of the fund. Through this 'performance bonus', the fund also benefits from the fact that the investments make money. Traditionally, these rewards have been 2% of the initial amount and 20% of the realised profit - we therefore refer to this as the 'two and twenty' model.
Private equity funds come in all shapes and sizes. From small funds that focus very specifically on SMEs (often in a specific sector) to large generalists managing billion-dollar funds and scouring the globe for suitable companies. No two funds are the same. And picking the right funds, especially with the number of private equity funds growing significantly, requires expertise.
Over the past decades, private equity has proven itself as an investment category. So far, however, it has not been easy to participate as an individual investor. But Marktlink Capital's funds-of-funds now make private equity accessible. Read more about how private equity works. Venture capital is a subcategory of private equity. Find out what venture capital entails and read here what the main differences are between private equity and venture capital.
