Private equity refers to investment in privately held companies, typically by a private equity firm or investment fund that provides capital in exchange for an ownership interest in the business.
Private equity firms generally seek to invest in businesses with opportunities for growth, operational improvement, increased profitability or other forms of value creation. Depending on the investment strategy, a private equity firm may acquire a minority stake, a controlling interest or the entire company.
Private equity is an important part of the broader private markets ecosystem and is commonly associated with business acquisitions, management buyouts, growth capital, leveraged buyouts and corporate restructuring.
For businesses considering external investment, acquisition or significant expansion, understanding private equity terminology can help when evaluating funding options, preparing for due diligence and improving the systems and processes that support business growth.
What Is Private Equity?
Video explainer:
Private equity is a form of investment where capital is invested into companies that are not publicly traded on a stock exchange.
A private equity investment may be used to:
- Fund business expansion
- Acquire another company
- Improve business operations
- Develop new products or services
- Enter new markets
- Invest in technology and infrastructure
- Restructure or strengthen the business
- Support a management buyout
- Provide an exit for existing shareholders
- Prepare a business for a future sale
Private equity investments are generally made with a medium- to long-term investment horizon. The investor typically seeks to increase the value of the business before eventually exiting the investment through a sale, merger, recapitalisation or another transaction.
For businesses, this can make operational efficiency, technology infrastructure, customer acquisition, financial performance and scalable systems particularly important.
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How Does Private Equity Work?
A typical private equity investment involves several stages.
1. Fundraising
A private equity firm raises capital from investors known as limited partners (LPs). These investors may include institutional investors, superannuation funds, family offices, pension funds and high-net-worth investors.
The private equity firm generally acts as the general partner (GP) responsible for managing the fund and making investment decisions.
2. Investment Strategy
The private equity firm establishes an investment strategy that determines the types of businesses it wants to acquire or invest in.
Investment criteria may include:
- Industry
- Geographic market
- Business size
- Revenue
- Profitability
- Growth potential
- Competitive position
- Management team
- Technology infrastructure
- Recurring revenue
- Customer concentration
- Acquisition opportunities
3. Deal Sourcing
Private equity firms identify potential investment opportunities through relationships, investment advisers, corporate finance firms, intermediaries, business owners and direct approaches.
4. Due Diligence
Before completing an investment, the investor conducts due diligence to understand the financial, operational, commercial, legal and technological position of the company.
Technology and systems can form an increasingly important part of this process, particularly where a company relies on software, integrations, online platforms, customer portals, eCommerce infrastructure or automated workflows.
5. Investment or Acquisition
If the investment opportunity meets the firm’s requirements, the parties negotiate the transaction and investment terms.
The private equity firm may acquire a minority interest, majority interest or full ownership of the business.
6. Value Creation
After investment, the private equity firm and management team may implement initiatives designed to improve the company’s performance and increase its value.
This could include:
- Operational improvements
- Technology upgrades
- New sales channels
- Digital marketing
- Process automation
- Product development
- Geographic expansion
- Acquisitions
- Cost optimization
- Management changes
- Improved reporting and business intelligence
7. Exit
Eventually, the private equity investor seeks to realize its investment.
An exit may involve selling the business to another company, selling to another investment fund, completing a management buyout or pursuing another transaction.
Private Equity vs Venture Capital
Private equity and venture capital are both forms of private investment, but they generally target different types of businesses.
Venture capital typically focuses on early-stage and high-growth companies, particularly startups with significant potential for rapid expansion.
Private equity generally focuses on more established businesses with existing revenue, operations and commercial infrastructure.
There can be overlap between the two investment models, particularly in growth-stage businesses.
| Private Equity | Venture Capital |
|---|---|
| Often established businesses | Often startups and early-stage businesses |
| May acquire controlling interests | Usually minority investments |
| Focus on operational and financial improvement | Focus heavily on future growth |
| Often larger transactions | Often earlier-stage funding rounds |
| May use debt as part of the transaction | Typically relies primarily on equity |
| Defined investment and exit strategy | Often longer-term growth and liquidity strategy |
Key Private Equity Terms
Acquisition
An acquisition occurs when one company or investor purchases another company or a significant interest in it.
Acquisitions can be used by private equity-backed businesses to accelerate growth, expand into new markets or consolidate fragmented industries.
[Internal link: Business Acquisition Technology]
Add-On Acquisition
An add-on acquisition occurs when an existing portfolio company acquires another business.
This strategy can allow a private equity-backed company to increase market share, add capabilities, enter new geographic areas or achieve operational efficiencies.
Buyout
A buyout is the acquisition of a controlling interest in a company.
A buyout can involve a private equity firm, management team or another company.
Management Buyout
A management buyout (MBO) occurs when a company’s existing management team acquires all or part of the business.
MBO transactions can involve private equity funding where the management team requires external capital to complete the acquisition.
Leveraged Buyout
A leveraged buyout (LBO) is an acquisition where a significant portion of the purchase price is financed using debt.
The acquired company’s assets, cash flow and future earnings may form part of the financial structure supporting the transaction.
Growth Capital
Growth capital is investment provided to an established company to support expansion.
Unlike some buyout transactions, growth capital may not involve the investor acquiring full control of the company.
Growth capital can fund:
- Product development
- Market expansion
- Hiring
- Technology
- Sales and marketing
- New facilities
- International expansion
Portfolio Company
A portfolio company is a business that is owned or invested in by a private equity firm or investment fund.
A private equity firm may own multiple portfolio companies across different industries or geographic markets.
Investment Fund
A private equity fund pools capital from multiple investors and uses that capital to make investments in businesses.
The fund is generally managed according to a defined investment mandate and strategy.
General Partner
The general partner (GP) is typically responsible for managing a private equity fund and making investment decisions.
The GP manages the fund’s investment strategy, portfolio and eventual exits.
Limited Partner
A limited partner (LP) is an investor that provides capital to a private equity fund.
LPs typically do not manage the day-to-day investment decisions of the fund.
Fundraising
Fundraising is the process through which a private equity firm raises investment capital from limited partners.
A fund may have a specific investment mandate, target fund size and investment period.
Deal Sourcing
Deal sourcing refers to the process of identifying potential investment opportunities.
Private equity firms may source deals through investment bankers, advisers, intermediaries, professional networks, direct outreach and proprietary relationships.
Due Diligence
Due diligence is the investigation and assessment of a business before an investment or acquisition is completed.
Private equity due diligence can cover:
- Financial performance
- Legal matters
- Tax
- Operations
- Customers
- Employees
- Technology
- Cybersecurity
- Intellectual property
- Contracts
- Market position
- Commercial opportunities
Commercial Due Diligence
Commercial due diligence examines the commercial position and future prospects of a business.
This can include market size, customer demand, competition, pricing, customer concentration, sales performance and growth opportunities.
Technology Due Diligence
Technology due diligence evaluates a company’s technology environment before an investment or acquisition.
It may assess:
- Software architecture
- Custom applications
- Infrastructure
- Cloud services
- Cybersecurity
- Integrations
- Technical debt
- Data
- Scalability
- Development processes
- Software licenses
- Intellectual property
For technology-dependent businesses, this can be an important component of understanding operational risk and future investment requirements.
Technical Debt
Technical debt describes the future cost or limitations created by previous technology decisions.
Examples include outdated software, fragile integrations, undocumented systems, duplicated processes and applications that are difficult to maintain.
Technical debt can become particularly important during investment or acquisition due diligence because it may represent future capital expenditure or operational risk.
Value Creation
Value creation refers to initiatives intended to increase the economic value of a portfolio company.
Private equity value creation strategies may include revenue growth, operational improvements, cost efficiencies, acquisitions, technology investment and market expansion.
EBITDA
EBITDA stands for earnings before interest, taxes, depreciation and amortization.
It is commonly used as a measure of operating performance and is frequently referenced in private equity transactions and business valuations.
EBITDA Multiple
An EBITDA multiple compares a company’s enterprise value with its EBITDA.
For example, if a company has an enterprise value of $20 million and EBITDA of $2 million, its enterprise value-to-EBITDA multiple would be 10x.
Enterprise Value
Enterprise value (EV) represents the value of a business’s operating assets and is commonly calculated using equity value plus debt, less cash.
Enterprise value is frequently used when analyzing acquisitions and calculating transaction multiples.
Equity Value
Equity value represents the value attributable to the company’s shareholders.
It differs from enterprise value because enterprise value also considers debt and cash.
Capital Structure
A company’s capital structure describes how its operations and assets are financed through combinations of equity and debt.
Private equity transactions often involve restructuring a company’s capital structure as part of the investment.
Debt Financing
Debt financing involves borrowing money that must generally be repaid according to agreed terms.
Debt can form part of the financing structure used in leveraged acquisitions.
Equity Financing
Equity financing involves raising capital by selling an ownership interest in a company.
Unlike debt financing, equity generally does not involve scheduled repayment of the investment.
Exit Strategy
An exit strategy outlines how an investor intends to eventually realize its investment.
Common private equity exit strategies include:
- Sale to another company
- Sale to another private equity fund
- Management buyout
- Merger
- Recapitalization
- Public listing
Trade Sale
A trade sale occurs when a business is sold to another operating company, often a strategic buyer within the same or a related industry.
Recapitalization
Recapitalization involves changing the financial structure of a company.
A private equity-backed company may undertake recapitalization to alter its balance of debt and equity or provide liquidity to shareholders.
Return on Investment
Return on investment (ROI) measures the return generated relative to the amount invested.
Private equity investors use various measures to assess investment performance.
Internal Rate of Return
Internal rate of return (IRR) is a measure used to estimate the annualized rate of return generated by an investment over time.
It is commonly used when evaluating private equity investment performance.
Multiple on Invested Capital
Multiple on invested capital (MOIC) measures how much value an investment has generated relative to the original amount invested.
For example, a 2x MOIC means an investment has generated value equivalent to twice the original invested capital, before considering the timing of those returns.
Private Markets
Private markets are investment markets involving assets that are not publicly traded.
Private equity is one category within private markets, alongside areas such as private credit, venture capital and infrastructure investment.
Why Technology Matters in Private Equity
Technology is increasingly connected to the operational performance and scalability of modern businesses.
For a private equity-backed company, technology may influence revenue generation, customer experience, operating costs, reporting, employee productivity and the ability to scale.
A business may have strong commercial potential but still rely on disconnected spreadsheets, manual processes, legacy applications or multiple systems that do not communicate effectively.
This can create operational friction and make future growth more difficult.
A business systems audit can help identify where technology, workflows and software infrastructure are creating unnecessary complexity.
For businesses preparing for investment, acquisition or significant growth, areas worth reviewing can include:
- Core business software
- Custom applications
- CRM systems
- Accounting integrations
- Customer portals
- Ecommerce platforms
- Data management
- Reporting and dashboards
- Workflow automation
- Cybersecurity
- Cloud infrastructure
- API integrations
- Technical documentation
Private Equity and Digital Growth
Private equity-backed businesses may also invest in digital growth as part of a broader value creation strategy.
Depending on the business model, this could include:
- Search engine optimization
- Paid advertising
- Conversion rate optimization
- Content strategy
- Digital PR
- Brand visibility
- Lead generation
- eCommerce optimization
- Customer acquisition
- Marketing automation
Digital marketing is particularly relevant where customer acquisition represents a significant driver of business value.
Private Equity and Business Software
Software can become a strategic asset when it directly supports a company’s operations or competitive advantage.
Some businesses can operate effectively using established SaaS platforms and integrations. Others eventually reach a point where their workflow does not fit neatly within off-the-shelf software.
In these situations, custom software development can provide a way to build functionality around the company’s actual processes.
This might involve:
- Custom business applications
- Internal dashboards
- Client portals
- Workflow management systems
- Booking platforms
- Inventory systems
- Ordering systems
- CRM integrations
- Automated reporting
- API integrations
- SaaS products
The appropriate solution depends on the business, its existing technology stack and the commercial objective.
Preparing a Business for Investment
A business does not necessarily need to be preparing for a private equity transaction to benefit from stronger systems and infrastructure.
However, businesses considering investment, acquisition or an eventual exit may benefit from greater visibility into their operations.
Areas to consider include:
Documented processes
Important operational processes should not exist solely as informal knowledge held by one employee or business owner.
Reliable data
Management should have access to accurate information about customers, sales, operations and financial performance.
Scalable systems
Technology should support the business’s current requirements without creating unnecessary barriers to future growth.
Integrated software
Where multiple systems are used, appropriate integrations can reduce duplicate data entry and manual administration.
Cybersecurity
Security controls, access management, backups and data protection should be appropriate to the organization’s risk profile.
Technology documentation
Documentation can make it easier to understand how important systems operate and where dependencies exist.
Business continuity
Critical systems and processes should have appropriate contingency arrangements in place.
Is Private Equity Right for Every Business?
Private equity is not automatically the right source of capital for every business.
Private equity investment often involves an exchange of ownership and may involve significant expectations around growth, profitability, governance and eventual exit.
Business owners considering external capital should assess their objectives, financial position, growth plans, desired level of control and long-term goals before deciding whether private equity is appropriate.
Other potential sources of capital may include:
- Bank finance
- Business loans
- Venture capital
- Angel investment
- Strategic investment
- Growth capital
- Bootstrapping
- Government funding
- Revenue-based financing
Professional financial, legal and investment advice should be obtained where appropriate.
About AGR Technology
AGR Technology works across software development, digital growth, automation and technology strategy, helping businesses identify practical opportunities to improve their systems, digital presence and operational infrastructure.
We can support private equity firms through consulting and management of their portfolio companies with our digital expertise as well as help audit companies to ensure their infrastructure is well equipped and scalable prior to acquisition.
Frequently Asked Questions
What is private equity in simple terms?
Private equity is investment into privately owned businesses. An investor or investment fund provides capital in exchange for an ownership interest, with the aim of increasing the value of the investment over time.
What does a private equity firm do?
A private equity firm raises capital from investors, identifies investment opportunities, acquires or invests in businesses and works with management to improve business performance and ultimately realize a return on the investment.
What is the difference between private equity and venture capital?
Private equity generally focuses on established businesses and may involve acquiring controlling interests. Venture capital generally focuses on earlier-stage companies with significant growth potential.
Why do private equity firms invest in businesses?
Private equity firms may invest in businesses because they identify opportunities to increase revenue, improve operations, expand into new markets, make acquisitions or otherwise increase the value of the company.
What is a private equity portfolio company?
A portfolio company is a business that has received investment from, or has been acquired by, a private equity fund.
What is a leveraged buyout?
A leveraged buyout is an acquisition where debt is used as a significant part of the financing structure.
What is private equity due diligence?
Private equity due diligence is the process of investigating a potential investment before the transaction is completed. It can cover financial, legal, commercial, operational and technology-related areas.
Can technology affect a company’s private equity valuation?
Technology can affect operational efficiency, scalability, revenue generation, customer experience and risk. These factors can influence how investors assess a business, although valuation depends on many financial and commercial considerations.
Can private equity invest in technology companies?
Yes. Private equity firms can invest in technology companies, software businesses, SaaS companies and other technology-enabled businesses, depending on the firm’s investment strategy.
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