How do private equity firms operate?

Posted in: Raising finance


How do private equity firms operate – and how do the best ones stay on top?

As a successful entrepreneur, you understand how important the supply of capital is to growing a business.

Private equity firms contribute to the availability of capital and can provide vital funding which cannot be found through other sources, in turn helping to drive wider economic growth.

Today, businesses in a wide range of sectors are increasingly considering whether PE funds may be a good source of investment to take their businesses forward.

If you’re an owner-manager of a private company seeking to sell a stake of your company to a private equity firm, then it’s wise to become familiar with how PE funds and the firms behind them operate.

Here, we offer an overview of how PE firms are structured and investigate how successful PE firms stay at the head of the pack.

How PE firms are structured.

The structure of a private equity fund entails two classifications of fund participation: general partners and limited partners.

When a deal takes place, the private equity firm is set up as the general partner (GP) and assumes responsibility for managing, administering, and operating the private equity fund.

The GP sources a significant share of capital – around 50% – from various investors and invests it in the fund. They are responsible for attaining capital commitments from third-party investors, known as limited partners (LPs).

Limited partner investors typically include institutions such as pension funds, university endowments, insurance companies as well as wealthy individuals.

If you’re an owner-manager of a private company seeking to sell a stake of your company to a private equity firm, then it’s wise to become familiar with how PE funds and the firms behind them operate.

The makings of a successful PE firm.

Few private equity firms are household names, and their approach to individual competencies are even less well known. At Clearwater Growth, our advisors’ extensive experience working with private equity firms has provided them insight into the strengths and values of successful PE firms. While these qualities may vary, they most often include at least some of the following:

Cultivating strong relationships.
PE firms that are skilled at building positive working relationships with their portfolio companies, their limited partners and within their own teams will be best positioned to sustain growth in the long term.

Deep sector knowledge.
Private equity investors have long-term horizons and leverage deep sector knowledge as they work closely with the company’s management to improve performance and strategic direction. It does this by aligning incentives, improving business plans, making operational improvements, and strengthening corporate governance.

Fast decision-making.
Becoming the majority stakeholder following a business transaction means that decision-making is streamlined, as an annual general meeting is not required. Effective PE teams working with existing management tend to make many more decisions, in a much shorter period, than during business as usual.

Using leverage strategically.
Private equity firms use debt as the main source of consideration when acquiring a company. The use of leverage (debt) enables the firm to achieve higher returns.

The private equity outlook in 2022.

Over the course of the last decade, the size of the private equity market – in terms of assets under management (AUM) and number of private equity investors – has tripled, thanks to the more widely publicised availability and accessibility of the asset class.

Today, more than one million people in the UK are employed by companies backed by private equity and venture capital. And this isn’t limited to large unlisted companies, as in recent years around 90% of private equity investment has been in small and medium-sized businesses.

But the changes to private equity don’t end there. Since the onset of the pandemic in 2020, many PE firms have stepped up to support their portfolio companies in a number of ways, especially in the provision of management input and industry connections as well as the influx of capital. Portfolio companies—especially smaller ones— have been in a position to benefit from new network connections and a boost in expertise, helping to ensure they can better weather the storm.

In 2021, mid-market private equity investment in the UK soared to the highest level ever recorded. And while this spike has led analysts to question whether PE investment has peaked, leaders in the industry anticipate that activity will remain high throughout this year.

Authored by.

Rob Britton


07774 741 255

Based in the Midlands, I am a founding member of Clearwater International since 2003. My background includes working for BDO Corporate Finance and in the Specialised Finance arm of NatWest Group prior to that, giving me over 25 years of experience in the corporate finance industry.

As a Partner in the Clearwater International Industrials & Chemicals sector team I have advised clients on c.60 deals. Having the opportunity to work with interesting people and businesses across a range of sub-sectors, with a focus on the client at the heart of everything we do is what makes the job exciting. There is nothing more satisfying than helping a business owner through the challenges and rigours of a transaction on a day-to-day basis and then delivering the most successful outcome for them.

What first attracted me to Clearwater International was a solution-driven, adaptable approach to delivering corporate finance services to growing entrepreneurial businesses. That remains at the forefront of the business today and is the key driver of establishing the dedicated Clearwater Growth team, which I am very pleased to be a part of.

Outside of work I remain a keen sportsman and am proud to play Masters hockey for England.