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Private Equity Final

Private equity involves investing in companies that are not publicly traded. Capital for private equity is raised from institutional investors like pension funds and insurance companies and invested by private equity funds managed by general partners. Private equity funds provide equity capital to operating companies in exchange for ownership and help improve operations and increase profits through restructuring and long-term focus, with the goal of exiting via an IPO or sale. Private equity has advantages like improved company performance but also issues like illiquidity and long investment timelines.

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0% found this document useful (0 votes)

131 views13 pages

Private Equity Final

Uploaded by

Deepti Piplani

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Private Equity

Introduction about Private Equity

In finance, Private Equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange
Asset class representing the companies not publicly traded (vs. public equity traded on stock exchange)

Investments in private equity most often involve either an investment of capital into an operating company or the acquisition of an operating company
Medium to long term investment

Capital for private equity is raised primarily from Institutional Investors

Venture capital, growth capital, buyout PE funds are raised from pension funds, insurance companies, large corporate, HNWI, etc Investors in PE funds are called Limited Partners PE funds are managed by the General Partners

Structure of Private Equity participations

Insurance company

Pension fund

Large corporate

HNWI

The PE fund

Manager

Portfolio

Company A

Company B

Company C

Company D

Company E

Company D

Private Equity Fund

Private Equity Fund(PEF): is an investment company that provides equity capital in exchange for an ownership position in a private company (not traded on a public stock market post transaction)
Venture Capital(VC): invest in start-ups and early stage deals (Technology)

Leverage Buyout (LBO): is the process of acquiring a company using a significant amount of debt, which helps increase the acquirers equity return
Leverage Buyout Funds: invest in buyouts, usually of mature companies (Allied Capital)

Quick primer on Private Equity Industry jargon:

Private equity firm = financial sponsor (e.g. The Blackstone Group)

Strategic investor = corporation (e.g. Walmart)

LBO = Leveraged buyout MBO = Management buyout LP = Limited Partners GP = General Partners VC = Venture Capital IPO = Initial Public Offer IRR = Internal Rate of Return EV = Enterprise Value EBIDTA = Earnings Before Interest, Depreciation, Tax & Amortization

Why care about Private Equity

Why Private Equity

Restructuring Eliminate dysfunctional short-term focus Longer time frame - build value over time Direct alignment of shareholders and management

What is Private Equity?

Large pool of capital High-profile financial investor/ major corporation Buy down-but-not-out companies Taking target operations private, so that there is no public reporting Fixes, in other words improves those companies which are undervalued & under-appreciated
Lower their cost of capital Improve operations

Stock market exit at high multiple

Distinction between Private Equity & Public Equity?

Private Equity

Public equity Stock market listed companies

Venture capital Early stage financing Private equity is illiquid;

Buy-outs Later stage financing Secondaries

Public equity is liquid; Ownership is dispersed; Valuation is relatively easy;

Ownership is concentrated; Valuation is difficult; Intermediaries tend to be small; Finance is accompanied by control and mentoring

Intermediaries are large;

Finance is often divorced from control and mentoring

Whos investing / Sources of Funds ?

Banks Pension Funds Insurance Companies Corporate Investors Government Agencies Academic Institutions Capital Markets FDIs FIIs Private Wealthy Individuals Fund of Funds Others

Advantages of Private Equity(PE)

Companies, backed or acquired by PE firms are made more efficient and often produce higher profits:- which benefits not only the company but also the private equity firm The Investment professionals in the management receives carried interest, a portion of the profits, so managers and their staff are motivated to produce good results to investors

PE firms normally tend to work with--privately managed firms [Un-listed] so that they do not get constrained following the standards that public firms and funds must adhere to
By utilizing a team of highly qualified researchers: the PE firms generally perform very rigorous due diligence on potential investments & are able to identify most risks that would not otherwise be found

The Issues with Private Equity

Illiquid investments:
PE funds are closed-end funds (except secondary market)

Time line too long:

PE funds has a 5-year investment period and a 10-year life

Restricted information disclosure:

Only LPs have access to the funds performance

Difficulties for international investors to find suitable fund structures to invest in and avoid the risk of double taxation Valuation guidelines

Fund managers are often face complex tax and legal requirements, reducing their ability to focus on the commercial requirements of managing and growing the underlying investee companies Reporting guidelines
Governing principles