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Financial Insider: What is Private Equity?

Vince Bellino ’15, Finance Editor & Matt Chirokas ’15 Staff Writer

While often overlooked by the general public, private equity, plays a pivotal role in our day-to-day life and the progression of society.

One of the ways in which an entity experiences growth is through committed capital. Two sources of financing are debt or an equity stake in the company. Debt — borrowing money, that is — implies an interest rate and principal repayment. Startup companies will typically incur higher-than-average interest rates, given their high risk profile. Therefore, it is arguably safer to commit equity into a company’s capital structure.

Private equity firms provide resources to privately held companies in exchange for an ownership stake in the company. This provides funding for the business to pursue new initiatives to permit growth. They often consult with senior management in the strategic processes to help protect their investment and maximize growth and efficiency. Oftentimes, the private equity firm invests in a company with the goal of bringing it to the public markets for an initial public offering to reap the benefits of a five-year investment.

This facet within finance has provided the opportunities for companies to revolutionize the world. Both Apple and AT&T relied on private equity investments. Currently, Tesla has several private equity investors and stands a chance to change the landscape of transportation across the world.

Merrimack students are affected by the industry on a daily basis. The Sodexo food is funded in part, through the collaboration of several private equity investments. Snapchat also relies upon private equity funding because it may not be profitable yet, therefore relying on external financing to continue operations. Students who drink Jack Daniel’s, in part, rely on a private equity investment, therefore permitting proliferating growth and availability on a global platform.

It is quite clear, the private equity business plays an integral function in society. A pharmaceutical or technology company may struggle to succeed without a substantial equity stake to expand and deliver the next drug or world evolving technology. The financial industry allows companies, hospitals, and other enterprises to fully operate in part, due to committed capital from private equity firms across the world.

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