A quick presentation of the Private Equity field…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what does an M&A daily life looks like.

What does Private Equity consist in?

Private Equity, represents fundamental and indispensable funding-support throughout the life cycle of the company.
Private equity consists in taking (minority or majority) stakes in the capital of (small or medium) companies which are generally unlisted on the stock exchange. It is therefore a method of financing companies in order to support them on the path to growth in the relatively short term. Indeed, the objective of the private equity fund is obviously to realize a capital gain at the exit, after 5 to 8 years in general, the time for the invested capital to generate a return on investment.

What are the main categories of Private Equity?

Venture capital

This type of capital investment is mainly aimed at small businesses/start-ups. Its target is to launch the activity of a company in the creation or start-up phase. Indeed, for a start-up, it is often difficult and premature to call on bank loans that follow very specific and very standardized covenants.

Development capital / growth capital

It aims at entering the capital of a company that has reached a certain maturity and profitability. The funds collected will then be used for internal and external growth: respectively the development of the company’s offers in order to develop its activities or the acquisition of competitors.

Turnaround capital

This type of capital investment aims at restructuring a company in difficulty. The call for bank financing having generally become impossible when the company experiences a major crisis, the turnaround capital fund will enter the capital to allow the company to reconnect with profitability and profits.

Transmission capital

This mode of capital entry is observed when a change of owner occurs. The objective is to ensure the gradual transition and preserve the profitability of the company. Traditionally, the LBO “leveraged buy-out” or the LMBO “leveraged management buy-out” is used, i.e. its buyout by the debt of a holding company constituted especially for the occasion.

What does an analyst in private equity work on?

The tasks of a Private Equity analyst are diverse and include, for example, the producing and challenging a business plan, modelling different scenarios and strategies in Excel. The analyst and the investment teams of the private equity teams thoroughly analyze the companies seeking for funding. They try to determine whether the projections of the seeked investment are reasonable and not overestimated. Indeed, bear in mind that private equity funds intend to fund companies trough equity. And as equity investors (shareholders) are reimbursed at last in the event of a bankruptcy, their work is to determine if the company will really generate growth with the capital at stake. That’s why deep sector-analysis are also required from a private equity analyst.

About the author

The article was written in April 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).