Portfolio Management

So what kind of investments do private equity firms actually target? Private equity firms can greatly vary in size and scope. Some company’s such as KKR, TPG, Carlyle, and Blackstone have multiple investment funds focusing on different industries or company sizes (i.e. real estate, energy, Asian markets etc.). Other private equity firms are extremely focused and niche focusing on one specific industry. For example, Silver Lake Partners focuses on investments in the technology space. Regardless of what the fund focuses on, there are some common characteristics that make a good LBO target. We will cover both a good LBO candidate and some different strategies that exist.


All private equity firms work to create valuable, long-term relationships with each of their portfolio companies. Through these relationships, returns are ultimately created. Every firm looks at investing a little bit differently, and we have highlighted below some of the most of important factors in private equity strategy.

Lifecycle of the Investment

  • Angel/Seed Capital– These type of private equity firms usually bet on promising teams that are trying to test their ideas / hypotheses. Often times, the team doesn’t have a product yet and needs some capital to start building a prototype and prove it works.
  • Venture Capital– Venture capital firms provide minority equity investments in companies that have high growth potential in the future. These companies are usually just beyond the startup phase where they have proven that there is a potential large demand for their product or service.
  • Growth Capital– Growth equity can be thought of the intersection between private equity controlled buyouts and venture capital minority investing. Private equity firms that make growth capital investments take a large interest in the company’s operations to help the company achieve its growth potential.
  • Mezzanine Investing– Mezzanine investing is a hybrid investment between debt and equity that gives the lender ownership rights to a company in the case of default. Mezzanine investments are generally minority investments.
  • Leveraged Buyouts– This is the most well-known form of private equity investing that is highlighted above. Leveraged buyouts focus on mature companies that are leaders in their markets and have stable and predictable cash flows.
  • Distressed Buyouts– This is similar to a leveraged buyout, except the private equity firm buys a company that is under financial distress through financial leverage or operational volatility.

Types of Private Equity Investments

Private equity firms invest and buy many difference types of companies. Some focus specifically on one type of investment, and each type of investment has different characteristics. Some examples include:

  • Family-owned businesses
  • Founder-owned businesses
  • Corporate carve-outs
  • Underlevered businesses
  • Distressed business
  • Expansion capital for proven businesses
  • Special situations in private and public companies
  • Management buyouts
  • Growth capital
  • Seed funding for businesses that are not yet profitable
  • Mezzanine funding


Quantitative Investment Criteria

Private equity investments vary greatly in size. “Megafunds” such as KKR, TPG, Carlyle and Blackstone all have multiple investment pools with extremely large amounts of capital. This means that they have more capital to invest in any one given company, and they focus on large investments. Middle market funds tend to focus on smaller deals (e.g. family or founder owned companies) because they have smaller investment funds to manage. It is incredibly hard to generalize criteria between the spectrum of the funds, but some of the common metrics that are being considered when making investments are the following:

  • Revenue Size – range of values
  • EBITDA Size – range of values
  • Transaction Size – range of values
  • Equity Investment Size – range of values; most lenders will require private equity firms to write an equity check of 30%-50% of the total transaction price


Qualitative Investment Criteria

Many private equity firms will target specific qualitative criteria when evaluating investment opportunities, including the following:

  • Leader in its market / sustainable competitive advantage
  • Experienced management team
  • Strong and predictable cash flows / track record of profitability
  • Positive industry dynamics
  • Established business model
  • Low capital requirements (Capex and Net Working Capital)
  • Significant growth and reinvestment opportunities
  • Operational efficiency opportunities and synergies


Company Geography

Some funds focus on investments in a single country, a region or a market type. For example, KKR has an Asian Fund and Apax Partners has a European fund. Just like investing in stocks, the analysis is much different for a company based in developed markets compared to a company based in an emerging market. The most common investment region types are-

  • Companies with operations only in the United States
  • United States headquarters with Global operations
  • Global Companies

Target Industry Sector

As was stated above, some funds focus exclusively on one sector while others focus on a variety of sectors. Silver Lake Partners focuses on technology. Both Carlyle and Blackstone are well known for their real estate funds, but they also have funds that focus on other industries as well. If a private equity firm has several successful exits in a particular sector, it may feel more comfortable in that sector and keep seeking opportunities in the same sector. Some popular sectors today are:

Operational Investments

Some private equity firms have a very hands-on approach with the companies that they invest in. There are private equity firms that will buy a company and “get their hands dirty” in order to improve the operations of the company during the investment lifecycle. This might include replacing the management team, expanding into new product lines or markets, or acquiring smaller competitors in order to grow through acquisitions. On the other hand, there are private equity funds that take a much more hands-off approach and focus on the capital structure of the deal. However, the latter approach is becoming rarer as the PE market is becoming more and more efficient, making it nearly impossible to earn desired returns without significantly improving the company.

Exit Strategy

There are three common ways to exit a private equity investment, (i) through an IPO, or (ii) through a sale to another private equity firm, and (iii) through a sale to a strategic buyer (e.g. Fortune 500 company that has strategic reasons for the purchase).