What is a portfolio company? What to include in a portfolio
By Indeed Editorial Team
Updated 27 October 2022
Published 28 April 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Private equity firms hold an interest in a portfolio of companies. The aim of investing in these is to increase capital and growth and eventually sell each company for a profit. Learning how private equity firms fund portfolio companies can help you better understand the workings of private equity and improve a company's ability to grow. In this article, we look at private equity firms, business portfolios and how to create a business portfolio.
What is a portfolio company?
So, what is a portfolio company? A portfolio company is simply a company that a private equity firm invests in and continues to hold an interest in. Private equity firms are essential for a portfolio company. Examples of portfolio companies include family offices, pension funds, sovereign wealth funds and insurance companies.
What is a business portfolio?
A business portfolio for a private equity firm is the list of companies they support. Business portfolios include the collection of products, services and accomplishments of a company. The aim of a business portfolio is to attract new customers, differentiate the business from market competitors and demonstrate the business' presence in the market.
Business portfolio vs. product portfolio
Business portfolios are essential for presenting products, services and strategic business units. Unlike product portfolios, they include information on productive and fixed assets. They also allow you to state your mission and goals for the future. You can use a business portfolio to explain to customers how it can be useful to them and the benefits of buying with the business. In contrast, a product portfolio lists all the products and services that a company offers in detail, particularly the physical items.
Examples of what to include in a business portfolio
If you're looking to create a business portfolio, then the most traditional way is to use a brochure. In a brochure, you can logically lay out a concise overview of the business in a book format, which the business can easily present to potential investors. You can look at the business portfolios of other successful companies for good examples of what a business portfolio can look like. A portfolio might include the following:
Mission and branding statement: This is the ideal place to convince customers of the quality of products or services. Reading other companies' mission statements is a good place to start.
Skills: These can include the competency of staff and any supplementary skills. For example, the business may have an innovative brand or have marketed its product well.
Customer feedback: This can encourage other customers and potential investors. This is the place to show that the business can deliver its product or service to a high standard.
Career documents: The business can include its profile in this section. Including some successful projects shows it has an excellent track record.
Authorship: This section can include patents and business plans. You might also provide a list of published business materials detailing further information about its products.
Key accomplishments: This section can read like the achievements section on a CV. The business might include its success at implementing new procedures or detail profit increases.
Education and training of staff: The business can include the list of qualifications for key members of its executive board here. It might also include information on general staff training.
Recognitions: The business might include any professional recognition of the company here. This can bolster its reputation and encourage more customers to buy.
Additional information: The business can include recommendations and additional contact details in this section.
What is a private equity firm?
Private equity firms comprise a financial sponsor and several investors who seek a return for investing in a business. Investors engage in buyouts of specific companies and aim to hold around 100% of shares. In this way, they gain total control over company structure and decision making. Private equity firms usually belong to accredited investors who can guarantee sizeable sums of money over a long period.
They're useful sources of investment for failing businesses, which the equity firm then seeks to repair. When private equity firms take over a company, they typically seek to de-list it, change the management and improve overall financial performance.
Private equity structure
Private equity funds require both a private equity firm (financial sponsor) and investors. The financial sponsor is the general partner. They oversee the private equity fund and receive a management fee plus a proportion of interest earned as compensation for their investment. The investors are usually high-earning individuals who supply the capital required to invest in a company. Investors aim to sell a portfolio company at a higher price than the purchase price to generate a profit.
Types of private equity funding
To begin earning money, private equity firms find investors and raise funds. The primary source of revenue for private equity firms is management fees, which link to the capital raised. For example, some firms may charge a 2% management fee and around 20% of the profit gained from selling the company. Below are some of the popular types of private equity funding:
Distressed funding is when private equity firms direct their money into a failing business. This is similar to investing in an old real estate property and renovating it to sell for profit. The intention is to improve the company by restructuring management or selling assets. Assets can include physical property, such as machinery, or intellectual property, such as patents. Companies that are de-listed or bankrupt are popular for this type of funding. After the financial crisis in 2008, distressed funding became popular for companies who struggled to survive in the shifting market.
Related: What are private equity funds?
A leveraged buyout is the most popular form of funding. A private equity firm buys out a company and improves its business structure and financial revenue. To begin, a company identifies a potential business and creates a subsidiary to fund the buyout. The company primarily uses debt to fund the takeover, with a small amount of equity. Businesses raise the debt using a portfolio company's assets as security. The business often sells the shares on the stock exchange or to an interested party. Experts estimate that debt financing accounts for around 90% of overall funds in leveraged buyouts.
Real estate private equity
In real estate private equity, a business invests funds into commercial real estate and real estate investment trusts. Investor funds are inaccessible for several years, and the minimum capital required for a successful investment is much higher than other types of funding. This type of funding became popular after the 2008 financial crisis as a result of house prices crashing. The research company, Preqin, expects real estate funds in private equity to be worth $1.2 trillion by 2023.
Fund of funds
This type of funding involves investing in different types of funds, such as mutual funds and hedge funds. They're useful for investors who can't raise the minimum capital for other types of funds, but relying on hedge funds can involve a certain degree of risk. These funds typically have higher management fees as they're a combination of multiple funds. Also, diversifying investments doesn't always guarantee a steady return.
Venture capital funding is when investors provide capital to entrepreneurs. America's technological boom famously used it for funding in the renowned Silicon Valley. Investors may use venture capital funding in the early stages of a company's life, allowing marketing campaigns that can lead to a company's quick expansion. In contrast, investors may engage in seed financing, where they provide funds to develop an idea from its prototype phase. Investors usually take an equity stake in this type of funding.
Advantages and challenges of private equity
Private equity firms have attracted concerns over the years. Since 2015, the industry has called for more transparency within the private equity sector due in part to the very high salaries at these companies. These ventures require a lot of initial funding, which is only achievable for investors with access to huge amounts of money. Nevertheless, private equity companies' unconventional financing methods have proven effective in the past and can provide immediate working capital to companies that are just starting out.
Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.
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