When you trade on the Oslo Stock Exchange, you buy shares in public companies where all information is openly available to everyone (Public Equity). Private Equity is about the opposite: Investing in private companies behind closed doors.
It can almost be compared to buying a used, light blue 3.5 ton mini excavator on the private market. You see the potential, buy it at a good price, refurbish it, fix the engine, and sell it (or rent it out) with a solid profit. This is exactly what PE funds do with entire businesses!
"There is a place that you are to fill that no one else can fill, something you are to do, which no one else can do."
— Florence Scovel Shinn
PE funds look for companies that have an unrealized place in the market. They step in with capital and often brutal efficiency measures, replace management if necessary, and transform the company from the inside. This is called active ownership.
The different types of Private Equity
- Venture Capital (VC): Investments in brand new startups with enormous growth potential, but also enormous risk.
- Buyouts: When a PE fund buys the majority stake in an established company. Sometimes they buy a listed company to take it off the stock exchange, so they can restructure it in peace without having to worry about quarterly reports and impatient retail shareholders.
Time horizon: A PE fund rarely owns a company forever. They usually have a horizon of 3 to 7 years before planning an exit. This happens either by selling the company to another player, or by listing it (back) on the stock exchange.
Pros and cons
Advantages for investors
- Historically, the best PE funds have delivered higher returns than the general stock market.
- Provides access to exciting companies and technologies long before they become available to the general public on the stock exchange.
- PE managers have great power to create real change and value in the companies they own.
Disadvantages for investors
- This is usually only for the extremely wealthy. The minimum investment is often several million kroner.
- Your money is locked in for many years (low liquidity). You cannot just press sell like you can with a regular stock.
- It involves high risk, and the fees to the managers are often very high.