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What is Private Equity Placement?

Jim B.
Jim B.

Private equity placement refers to the process by which individual investors are connected with privately owned businesses in need of capital. These companies that partake in private equity are generally mid-market companies that are either struggling or simply need the capital to embark on a new business initiative. The process of private equity placement allows investors to receive equity in these businesses. This equity becomes more valuable if the business improves and either goes public on the open market or gets resold at some point in the future.

Many people tend to think of investing only in terms of the stock market, with shares of companies being bought and sold as prices rise and fall. There is another type of investment in privately owned businesses that is available to wealthy individuals who wish to become a bit more involved with their investment. Private equity placement allows investors to have an active role in business ownership while also providing a lifeline for businesses in need of capital.

Man climbing a rope
Man climbing a rope

Some businesses can't get the kind of financing they need from banks, and if they're not publicly traded on the stock market, they can't obtain capital from common investors. Such businesses are the perfect candidates for private equity placement. With the capital they receive through this process, mid-market companies can finance improvements to their business. If the company has fallen on hard times, it can use that capital as a way to rebuild the business and compete on a higher level.

In return for the capital it receives through private equity placement, a business often has to relinquish some control over its future. Since the fortunes of private equity investors are closely linked to the businesses in which they place their money, they often have the right to make decisions about these businesses. This may include anything from receiving a spot on a company's board of directors to the ability to make hiring and firing decisions for key company jobs.

To get involved in private equity placement, an individual usually signs up with a firm that specializes in the process and demands a significant minimum investment. Such firms often pool the funds of investors and put those funds into multiple businesses at once. If a company in which the firm invests steps up into the upper echelon of the business world, the reward for investors can be great. The equity they have in the company can be cashed in if the company is bought out or if it makes an initial public offering to the open market.

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