Private equity groups serving extremely an important function in the capital markets. This is due to the fact that they are able to source substantial amounts of capital from third-party investors and make economically viable investments into a host of companies. One of the key strengths regarding a private equity group or private equity firm is that these businesses are always able to remain profitable and cash flow positive. Many of these businesses maintain a diversified portfolio of investment companies especially among industries that are immune from negative changes in the economy like healthcare. These businesses typically also have very low operating costs given that they are able to source hundreds of millions if not billions of dollars in capital and have it managed by a team of people with a headcount of 10 to 50. These businesses generate substantial profits from their operations which typically includes a fee equal to 20% of all profits as well as a fee equal to 1% of all assets managed. Highly established firms may charge moderately higher fees.
For weaknesses, private equity groups are bound by a number of securities regulations in regards to how they operate. Given the nature of these businesses, most Mott medium-sized to large size private equity firms maintain in-house counsel that allows them to remain within the letter of the law at all times. This is really the only weakness associated with this business.
For opportunities, most private equity firms expand by establishing a number of limited partnerships in order to attract more capital from third-party investors. This is really the only way that these businesses expand outside of acquiring existing private equity groups that operate in a similar capacity. The return on investment for most private equity groups is a target of 20% to 40% per year.
For threats, the primary issue faced by these businesses typically revolves around maintaining compliance with securities laws. In the event that this is not it hereto, the fees can be substantial. Additionally, depending on the industry focus of the private equity group these businesses may have some subjective ability to negative changes in the economy. However this is somewhat of a muted risk given that most private equity firms are able to maintain highly diversified portfolios of businesses that always produce positive income.