Private equity is capital invested in private non-public companies that offer superior long-term return on investment. Investors include high-net-worth individuals, pension funds, charitable endowments and sovereign wealth funds. Private equity funds are often structured as limited partnerships, with partners taking an active role in the operations of portfolio companies. Successful private equity fund investors need a combination of technical and people skills.
Private equity fund management requires financial skills, such as analyzing financial statements and estimating the value of private companies. This can be a difficult process because private companies are not required to disclose their financial results. You need to understand contract law, because you will be involved in structuring potentially complex deals, including doing the necessary due diligence. An instinctive feel for, or direct experience in, different industries is also a useful skill, because private equity funds usually invest in companies across different industry sectors.
Private equity investors need negotiation and networking skills. You need to meet and speak with investment bankers, venture capital investors and other market participants to generate leads for possible deals. You must establish a certain level of trust with business owners and executives because you will need to work with them before and after closing transactions. You need negotiation skills because you have to convince business owners that your private equity firm can enhance shareholder value, while preserving organizational values and culture to an extent possible. You may also have to negotiate with other institutional investors to put together the financing for large deals. You may need to negotiate with labor unions to implement cost-saving measures to increase the earnings and cash flows of your portfolio companies.
Private equity investors take a hands-on approach in board governance and operational management. This approach is required to turn around financially distressed or undervalued companies and maximize shareholder value. Senior associates and managing directors take on board and senior executive management roles. They review periodic earnings reports, implement operational restructuring measures and get involved in long-term strategic planning.
Successful private equity investing requires certain other intangible people skills. You need to empathize with owners, who have built their companies their entire lives, and with employees concerned about their livelihood. You must know when to hold onto an investment and when to cut your losses. Most importantly, you need to take a long-term view, because it takes time to turn around and realize the true value of certain investments.
- RBC Global Asset Management: Private Equity: An Overview
- University of Central Arkansas, Small Business Advancement National Center: Understanding the Skills Needed for Careers in Private Equity Investing: Implications for Curriculum Development; William A. Andrews
- Harvard Business School Working Knowledge: Learning From Private-Equity Boards