A buyout fund takes money from investors and uses it to buy other companies, sometimes taking publicly traded companies private. It generally intends to improve their operations and cut costs, then resell the companies to other investors or on the public markets. Buyout funds are a type of private equity fund and are usually only open to wealthy investors.
Although buyout funds typically offer the promise of substantial profits for investors, they are very rarely accessible to the average investor. This form of private equity fund commonly invests in assets which are not publicly traded on stock markets, meaning that they are commonly considered 'off-limits' to the majority of investors.
Usually, buyout funds are a type of private equity fund, meaning they seek to invest in assets that aren't available through the public stock markets. Generally, private equity funds are only open to institutional investors like pension funds, university endowments and so-called accredited investors, meaning people with a high level of money and income defined by federal rules.
By limiting investment to these presumably sophisticated investors, they are able to be subject to less regulation than other, more public investment vehicles like mutual funds. Often they require investors to commit their funds for longer periods of time than mutual funds.
In some cases, buyout funds invest in privately held companies and in some cases they buy a controlling stake, or all of, a publicly traded company in order to remove it from the stock market and take it private. Some buyout funds may specialize in certain industries, like retail or technology, while others may pursue deals more generally. Some funds specialize in so-called leveraged buyouts, meaning they use large amounts of borrowed money to purchase other companies.
Other types of private equity funds might have other goals than pursuing buyouts, such as venture capital firms that seek to invest in, but not necessarily take a controlling interest in, new startup companies.
Buyout and Sale
Buyout funds often seek to purchase companies with the goal of making them more profitable. This can mean pursuing new lines of business, boosting production or cutting costs, such as by cutting staff or eliminating less profitable areas of business. Such funds are sometimes criticized for laying off workers and, when they're not successful in their efforts, speeding the destruction of once-successful businesses. However, proponents say in successful cases they can make struggling firms more efficient.
Then, assuming they achieve their goal, the buyout funds will seek to resell some or all of the shares in the companies they've purchased, either selling the company entirely or taking it public through an initial public offering, letting investors buy shares in the company.
Assuming they can sell a purchased company for more than they paid for it, they can make a profit that can be returned to their investors.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.