How does private capital work?
The Australian Investment Council’s member firms comprise institutional investors, private capital investment firms, as well as leading corporate and strategic advisors.
Private capital investment firms raise funds from a variety of sources, including institutional investors such as superannuation and pension funds, and invest these funds over a period of around ten years. Different types of private capital firms invest in businesses at varying stages of their development and life cycle. Some firms (such as venture firms) specialise in supporting businesses in their startup or early growth phase, while other firms may specialise in supporting businesses that are in a major growth or expansion phase (growth private equity).
For businesses that are underperforming or in financial difficulty, specialist investment firms (turnaround private equity funds) can play a valuable role in reviving the operations and re-positioning the businesses for future growth. Other specialist firms (buyout private equity and private credit) invest in larger corporations who may be divesting non-core business units, or seeking to take a publicly-listed corporation back into private ownership.
One of the key differences in the investment strategy of private capital firms is that the investment is typically accompanied by strategic support to help the business grow, expand and become more profitable in a sustainable and measurable way. Often, this means that private capital investors – as major shareholders – will become involved in supporting the business through appointing one or more representatives to the Board of Directors to assist the management team with developing and executing the business strategy.
After several years, private capital firms will look to divest all or some of their interest in the business in order to provide capital and returns back to the investors in the fund. Divestments generally occur through disposal of equity or other interests in the business via trade sale, secondary-market sale, share market listing, or a sale to management of the business.