Private Equity Firm SWOT Analysis

Private equity firms are some of the most profitable types of businesses to operate given that they are able to produce revenues from a number of different investments among a number of different sectors. One of the key strengths of a private equity firm is that they are almost always able to remain profitable and cash flow positive given that they place their funds in a number of different diverse investments. This is especially true among companies that invest in economically immune industries such as healthcare, transportation, and certain types of technology.

The costs of starting a new private equity for private equity firm are considered to be moderate. Generally, the legal fees associated with having a private placement memorandum developed as well as all the necessary incorporation fees are usually the most difficult aspect to starting a new private equity firm. As a rule of thumb, a new private equity firm typically requires around $100,000 to $500,000 in order to be able to accept investments via subscription agreements. Of course, these costs can be substantially higher if the individual is seeking to immediately raise hundreds of millions if not billions of dollars for their private equity limited partnerships.

One of the key weaknesses to a private equity firm is the substantial amount of regulations that need to be adhered to at all times. Generally, most private equity firms offer their limited partnerships as private securities so that they are not subject to the same ongoing reporting requirements as if they were a publicly traded company. However, there are still substantial fees are associated with the quarter to quarter and year to year accounting that must be done for the private equity firms limited partners. Ongoing legal expenses are also very high for these types of businesses. Additionally, the biggest expense associated with these types of firms is typically the payroll. Private equity firms require highly skilled employees that have a substantial understanding of capital markets, private investments, the legal structures of investments, and marketing. These costs typically are the vast majority of the expenses incurred by a private equity firm. Additionally, new regulations frequently take hold and as such the ongoing legal expenses in order to remain in compliance with the law is one of the weaknesses of these types of businesses.

For opportunities, most private equity firms seek seek to establish multiple series of limited partnerships in order to expand the capital base which they used to make private investments. Additionally, some private equity firms will obtain large-scale credit facilities so that they can leverage their equity in order to increase their rates of return for their private investors. In some cases, private equity firms will acquire third-party firms that operate in a substantially identical capacity in order to expand or operating infrastructure. The acquisition of additional capital for private investment is typically the way that most private equity firms expand their operations.

For threats, during times of economic recession private equity firms may have issues obtaining new investment or they may have investments at decline in value. However, a very well diversified private equity firm will typically deal to balance the risks associated with an economic recession against capital appreciation and dividends. Of course, as any person who is in business understands an economic recession is a risk faced by all businesses. The other common threat faced by private equity firms is increasing or changing regulation which again can impact a profit and loss statement of the firm given the complexity or need to change their business model. However, private equity firms have remained very popular among wealthy investors given that they are able to have access to a number of specialty investments that are not normally offered to the general public. As such, while there are some legal threats and economic environmental threats that can occur – these firms are typically almost always able to remain profitable.