What is private equity?
Most people in Germany have already encountered private equity in some shape or form – often without even being aware of it. Perhaps you have a pension plan or life insurance that invests in private equity funds. Or maybe you work at or are a customer of one of the many companies currently or previously financed by private equity.
Douglas, Gorillas, Zalando, Lieferheld, Schleich, Metabo, Compo, Verivox, Rodenstock, Interhyp, FlixBus – the list goes on and on.
Private equity refers to the capital that primarily institutional investors invest in companies not listed on a stock exchange via private equity firms. These private equity firms – or the private equity funds that they manage – purchase shares of companies that they believe will increase in value over time. These could be family-owned SMEs, subsidiaries of larger companies or even small start-ups.
There are many reasons for companies to sell shares to private equity funds:
- Entrepreneurs want to dispose of their shares as part of their succession plan
- A group wants to divest a subsidiary that no longer fits with its future business strategy
- Start-ups need capital to get their ideas off the ground.
When a private equity firm gets involved, this opens up a myriad of new possibilities for the companies:
- They can use the additional capital to develop new products
- Enter new markets or
- Acquire competitors.
The aim of the private equity firms is to make the companies better and more competitive – and therefore more valuable. Private equity firms predominantly support the development of new companies and German SMEs. In view of their key target companies, private equity is therefore primarily a tool for start-up and SME financing.
A large proportion of the capital for private equity funds comes from the UK, USA and Canada. This is because the retirement systems in these countries – unlike in Germany – are exclusively based on pension funds rather than a pay-as-you-go system.
These funds manage the contributions paid into them by the insured persons and profitably invest a substantial portion of these contributions in private equity funds. With the – often two-figure – returns that the funds generate, they secure the retirement income for many employees. Institutional investors (like insurance companies, banks and pension funds) are the sources of capital for private equity firms.
The private equity investment class is now firmly established as an integral component of institutional investment strategies: Virtually all institutional investors (such as insurance companies and banks) provide capital for private equity firms and their funds. In addition, many institutions like banks (including savings banks) invest private equity in companies directly via their own subsidiaries. The state and development banks in the individual states also invest in private equity funds or directly in the companies themselves.