Just like other investors, private equity firms have 3 stages to each investment they make: buy, hold and sell 🔄

PE firms start by searching for a company to buy, often sifting through dozens or even hundreds of potential candidates 🔍

This step is called “sourcing”.

Typically, PE firms look for struggling companies that have significant room for improvement, but that are also fundamentally strong businesses with growth potential 💼

They also prefer companies with low existing debt and stable cash flows, so that they can afford the interest payments that comes with taking on debt for an LBO

Once they’ve picked a company, PE firms perform due diligence – evaluating the company’s financial situation and business performance – then execute the deal, often through an LBO 🔏

Next, PE firms “hold” the acquired company in their portfolio for 3 to 5 years.

During this stage their goal is to increase the company’s profits, and therefore its value, as much as possible 💵

The easiest way to increase profits is by cutting costs, so many PE firms will start cutting costs by renegotiating contracts, restructuring debt and firing employees ✂️

Another way to increase value is through add-on acquisitions.

This means buying other smaller companies and integrating them into the business to make it stronger 🛍️

The private equity holding stage is unique because of the active role PE firms take in actually operating their businesses, compared to public market investors who are usually less active 🎮

Last is the selling stage, where PE firms look to “exit” their investment, or turn it into cash – ideally more cash than they bought it for.

Let’s learn more about this stage in the next lesson! ➡️