Primary navigation:

QFINANCE Quick Links
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Asset Management Checklists > Understanding Private Equity Strategies: An Overview

Asset Management Checklists

Understanding Private Equity Strategies: An Overview

Checklist Description

This checklist outlines the primary strategies used in private-equity investment.

Back to top


Private equity firms generally want to buy companies or parts of companies for their portfolios, repair them, enhance them, and sell them on. The investment period is seldom less than a year and can be as long as 10 years, but the objective is always to sell the business on at a substantial profit. Private equity investors have three main investment strategies:

  1. Venture capital is a broad class of private equity that normally refers to equity investments in less mature companies. Venture capital is often subdivided according to the phase of maturity of the company, ranging from capital used for the launch of start-up companies to later-stage and growth capital. It is often used to fund the expansion of an existing business that is generating revenue but may not yet be profitable or generating sufficient cash flow to fund future investment.

  2. Growth capital refers to equity investments (most often minority investments) in more mature companies that are looking for capital to expand or restructure operations, enter new markets, or finance a major acquisition without a change in the control of the business.

  3. The leveraged buyout (LBO) is a strategy of equity investment whereby a company, business unit, or business asset is acquired from the current shareholders, typically with the use of financial leverage. The companies involved in these buyouts are generally more mature and generate cash flows.

Occasionally, investments are made in distressed or special situations, where the equity or debt securities of a distressed company are unlocked as a result of a one-off opening, such as market turmoil or changes in financial regulations.

Back to top


  • Private equity can provide high returns, with the best private equity investments significantly outperforming the public markets. The potential benefits for successful investors can be annual returns of up to 30%.

  • An important perceived advantage of private equity is that the agency problem is reduced, because the owners have direct contact with the managers and can do detailed monitoring.

  • Because private equity firms focus on just a few investments, their due diligence is much more solid (and costly) than that of the investor in a public company.

  • Not only is a far larger share of executive pay tied to the performance of the business, but top managers may also be required to put a major chunk of their own money into the deal and have an ownership mentality rather than a corporate mentality.

  • With LBOs, management can focus on getting the company right without having to worry about shareholders.

Back to top


  • Most private equity investments have significant entry requirements, stipulating a considerable initial investment (normally upwards of $1,000,000), which can be drawn upon at the manager’s discretion.

  • Private equity investment is for those who can afford to have their capital locked in for long periods of time and who are able to risk losing it.

Back to top

Action Checklist

  • Bankers are much more wary of leveraged financing nowadays, and they should be included at the beginning of the planning, as well as during the negotiation stages.

  • Carefully analyze any business you might be proposing to acquire. Does its portfolio fit the characteristics required to mount an LBO? Can you revamp it, enhance it, and sell it? What time-frame will you be looking at?

  • Use specialist financial researchers and advisers. Remember that any undiscovered potential liabilities might cost more in the long run.

Back to top

Dos and Don’ts


  • In the primary stages, involve your lawyers and accountants in the evaluation of both the risks and the potential benefits of an acquisition.

  • When the company has been acquired, use incentives to engage the onboard key business managers in helping with the turnaround process.

  • Involve key stakeholders, and spell out in clear terms the risks the organization may be facing, their probability, and their potential impact, whether positive or negative.


  • Don’t put the cart before the horse and make the mistake of being drawn to a business that has not been thoroughly investigated. Consider not only whether it can be turned around, but also whether you can get the financing.

Back to top

Further reading


  • Fraser-Sampson, Guy. Private Equity as an Asset Class. Chichester, UK: Wiley, 2007.
  • Maginn, John L., Donald L. Tuttle, Jerald E. Pinto, and Dennis W. McLeavey (eds). Managing Investment Portfolios: A Dynamic Process. 3rd ed. CFA Institute Investment Series. Hoboken, NJ: Wiley, 2007.
  • Morris, Virginia B., and Kenneth M. Morris. Standard and Poor’s Guide to Money and Investing. New York: Lightbulb Press, 2005.


  • Dewar, Sally. “Private equity.” Australasian Business Intelligence (June 2007).
  • McKellar, Peter. “An appetite for private equity.” Investment Adviser (April 21, 2008). Online at:


  • British Private Equity and Venture Capital Association (BVCA):

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share