Private equity funds (PE funds) have become a very important source of innovative solutions at enterprises and a source of wealth in developed economies, notably in the US, the UK and Poland. They also play an increasingly important role in developing economies around the world. PE funds act as financial intermediaries that manage the cash entrusted to them by institutional investors such as pension funds, sovereign wealth funds, and insurance companies as well as banks and universities.
The investment partners of these funds allocate capital in companies with a potential for above-average internal rate of return. In mature economies, private equity is the most important alternative source of financing for small- and medium-sized enterprises with high growth potential, especially at early stages of development. In contrast, traditional financial institutions, such as banks and lending institutions, tend to see such entities as excessively risky. PE funds also play an active role in MBO / LBO transactions.
Apart from equity, such funds bring added-value (management capital), enhancing their portfolio companies’ competitiveness in domestic and international markets and boost market values. PE funds also exert substantial influence on the development of stock exchanges, facilitating initial public offerings for their portfolio companies.
The transition from PE fund to public offering often enables dynamic, new companies to reach a global market (e.g., Amazon.com, Alphabet / Google, Facebook, LinkedIn, etc.).