Is Private Equity the Same as M&A?

“Merger arbitrage sounds interesting, but I know very little about it”, you tell your friend in a crowded coffee cafe. You continue, “is private equity the same as M&A?” Your friend smiles and this is what she tells you …

Is Private Equity the Same as M&A?

Private equity is not the same as M&A (merger and acquisition). They are related finance concepts with distinct differences, here’s what your friend told you:

Private Equity – Private equity, or PE, is an investment vehicle where a private equity firm raises investment capital from institutional investors, peer firms, and wealthy individuals to acquire a majority or minority stake in a public company.

The PE firm seeks to improve the vested company’s performance by providing board representation, management advisory, and access to additional funding. PE firms look to generate substantial investor returns on a five-to-seven-year time horizon.

A private equity firm may elect to wholly acquire a company or take a minority stake in the firm or take the company private, which is to convert a publicly traded company to a privately held firm. The investment strategy used to affect these corporate actions is M&A.

Is private equity the same as M&A? They are not the same, however, PE firms engage in M&A activity to provide targeted companies:

Increased Growth – PE firms supply advisory expertise, market, and capital access.
Increased Profitability – PE firms advocate operational cost-cutting measures to improve profitability.
Greater Shareholder Value – Through management advisory, cost-cutting and divestiture activities, and capital infusion, PE enhances shareholder value.

Merger and Acquisitions (M&A) – Merger and acquisitions is an investment strategy in which two or more firms combine corporate resources, merge, to form one entity. M&A is also one company called the acquirer purchases another company, known as the target.

A buyer of a target company within the same industry is a strategic buyer, whereas private equity firms are usually not in the same industries as their targeted investment and are known as financial buyers.

Is private equity the same as M&A? Private equity is synonymous with M&A in that PE is a finance industry that employs M&A as an investment strategy to produce substantial capital gains.

What Percentage of M&A is Private Equity?

The percentage of M&A that is private equity is a conservative 36%. This figure is supported by industry growth that has tripled in the last decade and PE firms access to capital. PricewaterhouseCoopers, PwC, the international accounting firm, states U.S. private equity firms have invested approximately $10.7 trillion within the last decade.

Another contributing factor to the high PE-generated M&A activity is the PE industry’s deep M&A understanding and expertise. The private equity industry possesses formidable research and analytical capabilities allowing for quick target identification, finance sourcing, and transaction execution.

Investors are drawn to the PE investments in M&A because of the deal closure speed, the target firm’s potential fiscal improvement, and substantial short-time horizon profits.

Is private equity the same as M&A? Private equity is a type of investment vehicle that utilizes M&A as a strategy to blend one or more companies into an operating entity. Though intertwined, M&A is one of the tools PE uses to return substantial gains to its investors.