A private equity investor is a private individual who provides money to a new or struggling business. This individual will invest in the ideas and business plans that he thinks are worthwhile and profitable. Private equity investors are part of the private equity market, which is different from the venture capital market. It consists of organizations that pool together large sums of money to buyout a company or to offer a significant investment.
Typically, a private equity investor is an entrepreneur who has made a fortune from running his or her own business. He or she could be part of a larger private equity firm that looks for interesting business opportunities to invest in. Usually, investors put their money into a company that they are familiar with and that has the potential to become profitable.
The private equity investor will approach a new business differently from an established company that is struggling. Usually, new companies seek out private investors and present a proposal seeking investment. In such cases, the private equity investor isn't too concerned about profitability, but is more focused on interesting ideas. The personality of the business owner often goes a long way in determining whether the investor will accept the proposal.
When considering investment in a struggling company, it is the private equity investor who usually puts together an investment plan and proposal. Since the company is not doing so well, it is often more inclined to accept the offer presented by the investor. The private equity investor is primarily looking to make a profit through his or her investment, so is likely to propose a plan that appeals to the company.
New businesses often receive relaxed payback schedules of the equity investment. The investor doesn't typically oversee the day to day operations of the business. The hands off approach is often thought to stimulate new ideas and growth.
In contrast, established companies usually have a regular payback schedule, and the investors typically have a say in the management of the business. This includes setting the company's direction and hiring or firing employees. The level of input that the private equity investor has in the company is usually dependent on the size of the investment. Some companies are simply bought out, and the investors become the new owners.
The private equity market consists of equity that is not listed on a public exchange. The equity is raised by institutional investors including banks, insurance companies, and hedge funds.