what is private equity ownership?

Private equity ownership occurs when a PE firm acquires a private company, often using debt (a leveraged buyout). The firm takes control to improve operations and eventually sells the business for a profit.

how do they operate?

You may see the headlines about PE firms completing acquisitions for billions of dollars and wonder how they fund the deals, typically PE firms use a strategy called a leveraged buyout to acquire the company, this means they use their own capital but the majority of the financing comes from raising debt. This debt is raised by borrowing money from banks or by issuing high yield bonds. However, the debt is owed by the company which makes the company responsible for paying it back rather than the PE firm. In some cases the company can pay the PE firm a special dividend by taking out additional debt, this is called dividend recapitalisation.

how they make money.

Private equity firms can make money in a few different ways. Some ways PE firms can do well is by entering the right market at the right time, entering the company into new markets and improving the way the company runs. Despite the PE firm increasing the revenue of the company, the PE firm may not make a profit if they bought the company with lots of debt or when it was overvalued

A current example is the proposed acquisition of EA (Electronic Arts) for $55 billion. According to a Financial Times opinion piece published on 30 September 2025, the deal is valued at around 20× ebitda, which many consider overvalued. I think it’s a deal worth watching.

Pe firms have found creative ways to ensure they still make a profit, I think these are the most important:

1. management fees, which is a percentage of the fund charged annually by the management company
2. carried interest, percentage of the profits from selling a company, often around 20%, which goes to the PE firm
3. dividend recaps, which is the company borrowing more and paying the PE firm a special dividend before its sold

Also consider that in some cases, the PE firm manages to sell the company for more than they paid, which means they pay off the debt and keep the rest as profit.

how they make money even if the company fails.

Private equity firms can sometimes still make money even if the company they bought ends up going bankrupt. Along the way the PE firm may cut costs by cutting jobs and decreasing the funding of long term projects to focus on the short term, which improves profit margins. The revenue of the company may not be enough to pay back the interest of the loans but because the company had value before going bankrupt, its assets are sold off to pay back the lenders. Sometimes the company can lose its initial investment but it often already collected fees and special dividends before the collapse. For example, PE owners of Neiman Marcus took large special dividends while saddling the company with heavy debt (JS Morlu LLC, 2025), only for Neiman Marcus to later file for bankruptcy.

References

1. Financial Times. (2025). Electronics Arts buyout shows how private equity game has changed. Opinion, 30 September 2025. [Subscription required].
2. JS Morlu LLC. (2025). The hidden peril of private equity: How dividend recapitalization can make or break a business. [online] Available at: https://www.jsmorlu.com/financial-business-guides/private-equity-trap/ [Accessed 30 Sep. 2025].

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