How private equity works

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The private equity industry plays a huge role now in the financial market.  Even the largest corporations in the U.S., including those in the Fortune 500 list, develop strategies in wealth building through private equity.

Back in 1946, two venture capital firms, American Research and Development Corporation (ARDC) and J.H. Whitney & Company, were established.  WWII has just ended, and it was a financially difficult time for entrepreneurs and business owners who had been enlisted in the war. 

Both companies had an objective of sourcing and pooling funds from wealthy families, in addition to the money the founders had put in themselves.  ARDC sought to help returning soldiers who had businesses by encouraging private sector investments in them.  Meanwhile, J.J. Whitney & Company sought to help entrepreneurs who were unwelcome at banks by financing their projects or ventures.

Before WWII, private equity investments had primarily been made by wealthy individuals and families.  But the successful business models of the two aforementioned companies opened the door for private equity businesses. 

Image source: corporatebytes.in

Now, there are countless private equity firms.  They practice a diverse range of strategies, but the fundamental process remains the same: funds are raised to create a limited partnership with companies that are typically not listed in the public stock exchange.  The company would then be restructured or reorganized so that value can be added to it, which would help the private equity firm net returns from the venture.

Alex J. Ness is the founder and CEO of Domus One Group, a private equity firm that provides fully integrated real estate platforms for investors, buyers, sellers, and developers. Read more discussion about the industry by visiting this blog.