John LoPinto Explains What Private Equity Is and How It Works

John LoPinto

January 28, 2022

John LoPinto Explains What Private Equity Is and How It Works

According to John LoPinto, a private equity firm is an investment company. The firm puts money into another business to increase its value and then sells it later. Also, PE companies raise capital through their limited partners (LPs).

Another thing to note about private equity firms is that they own a significant share in several businesses at once. They’re the majority shareholders.

What is a private equity investor?

John LoPinto adds that private equity firms have private equity investors specializing in looking for businesses with viable investment opportunities.

What is a private equity fund?

When a private equity firm has identified a company to invest in, it raises capital through its limited partners. The capital becomes a private equity fund and a source of finance to invest in promising firms, explains John LoPinto.

PE funds vs. hedge funds

One similarity between PE funds and hedge funds is that only accredited investors offer them. However, PE funds focus on private markets, investing in private firms, while hedge funds target publicly traded companies. These businesses are on the public markets, John LoPinto says.

PE funds vs. mutual funds

As John LoPinto notes, PE companies raise capital from accredited investors, its LPs. On the other hand, mutual funds depend on getting capital from ordinary investors. John LoPinto also says that PE funds tend to invest in private firms, while mutual funds, like hedge funds, invest in public corporations.

Another observation that John LoPinto makes is that mutual funds charge management fees, but PE funds bill performance fees.

How do private equity firms make money?

John LoPinto explains that a private equity firm can charge you performance and management fees.

Management fees

A PE fund calculates management fees as a percentage of assets it manages, around 2%. These fees cover the firm’s overhead and other operational expenses.

Performance fees

PE funds calculate performance fees as a percentage of investment profits, around 20%. In addition, the private equity firm uses these fees to reward and motivate successful employees.

How does private equity work?

The most popular investment type for a private equity firm is a leveraged buyout or LBO, John LoPinto explains. A PE investor buys a stake in a company to have complete control using a mixture of debt finance and equity.

When the PE investor has made the company profitable, they can sell it to another company. LPs will then receive a share of the profits.

A leading professional in the New York Area

LoPinto co-founded a leading Private Equity Firm based in New York and is currently the company’s Managing Director. A leader of note, LoPinto, carries with him 20 plus years of experience and even continues to learn new ways of leadership.