Private equity

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Private equity usually refers to an investment fund that is regulated as a limited partnership that is not publicly traded and whose investors are usually large institutional investors, university endowments, or wealthy individuals. Private equity firms are known for their extensive use of debt financing to buy companies, which they refund and try to resell for a higher value. Debt financing reduces the corporate tax burden and is one of the main ways in which private equity firms make business more profitable for investors. Private equity may also create value by overcoming agency costs and better aligning the incentives of corporate managers with their shareholders.

PE. is, strictly speaking, the type of equity and one of the asset classes consisting of equity and debt securities in an operating company that is not publicly traded on the stock exchange. But the term has been used to describe the business of taking the company into private ownership to fix it before selling it again with the expected profit.

Private equity investments will generally be made by private equity firms, venture capital firms or angel investors. Each of these investor categories has its own set of goals, preferences, and investment strategies; however, all provide working capital to the target company to maintain expansion, new product development, or restructuring of operations, management, or ownership of the company.

Bloomberg Businessweek has called private equity as the rebranding of leveraged-buyout companies after the 1980s. Common investment strategies in private equity include leveraged buyouts, venture capital, capital growth, depressed investment and mezzanine capital. In a typical leveraged-buyout transaction, private equity firms buy majority control from an existing or mature company. This differs from venture capital or capital-growth investments, where investors (usually venture capital firms or angel investors) invest in young, emerging or emerging companies, and rarely gain majority control.

Private equity is also often grouped into a broader category called private capital, commonly used to describe the capital that supports any illiquid long-term investment strategy.

Video Private equity

Strategy

Strategies that may be used by private equity firms are as follows, leveraged buyout becomes the most important.

Leveraged Purchases

Leveraged buyout, LBO or Buyout refers to a strategy of making an equity investment as part of a transaction in which a company, business unit or business asset is acquired from current shareholders usually with the use of financial leverage. Companies involved in these transactions are usually mature and generate operating cash flow.

Private equity firms view targeted firms as either a Platform company that has sufficient scale and a successful business model to act as a stand-alone entity, or as an addition or slip in the acquisition, which will include companies with insufficient scales or other deficits.

Leveraged buyouts involve financial sponsors who approve acquisitions without having to do all the capital required for acquisitions. To do this, a financial sponsor will increase the acquisition debt that will ultimately see the cash flow from the acquisition targets to make interest and principal payments. Debt acquisition in LBO often does not help financial sponsors and has no claims on other investments managed by financial sponsors. Therefore, the financial structure of LBO transactions is very attractive to financially limited partners, allowing them to benefit from leverage but greatly limiting the level of assistance from such leverage. This pile of financing structures benefits LBO's financial sponsors in two ways: (1) the investor itself only needs to provide a fraction of the capital for the acquisition, and (2) the return on investors will be increased (as long as the return on assets exceeds the cost of debt).

As a percentage of the purchase price for the leverage purchase target, the amount of debt used to finance the transaction varies according to the financial condition and history of acquisition targets, market conditions, the willingness of the lender to extend the credit (both for LBO financial sponsors and the company to be acquired) interest and the company's ability to cover those costs. Historically the share of LBO debt will range from 60% -90% of the purchase price. Between 2000-2005 the debt averaged between 59.4% and 67.9% of the total purchase price for LBO in the United States.

A simple example of leveraged buyout

Private equity funds say for example, ABC Capital II, borrowing $ 9bn from banks (or other lenders). For this he added $ 2 billion of equity - money from his own partner and from limited partners (pensions, the rich, etc.). With this $ 11 billion, he bought all the shares of a poorly performing company, XYZ Industrial (after due diligence, ie checking the books). It replaces senior management at XYZ Industrial, and they start streamlining it. Workforce is reduced, some assets are sold, etc. The goal is to increase the company's value for initial sales.

The stock market is experiencing a bull market, and XYZ Industrial is sold two years after purchase for $ 13 billion, generating a profit of $ 2 billion. The original loan can now be repaid with interest, say, $ 0.5 billion. The remaining $ 1.5 billion earnings are shared among partners. Taxation of such profits is at the rate of capital gain.

Note that some of the profits come from changing firms, and partly the result of a general increase in stock prices in the soaring stock market, the latter often becoming a larger component.

Note:

• The lenders (those who install $ 9bn in the example) can make sure of default with a syndicated loan to spread the risk, or by purchasing credit default swaps (CDSs) or selling collateral debt obligations (CDOs) from/to other institutions (although this is not a business of private equity firms).
• Often the loan/equity ($ 11bn above) is not paid off after the sale but left on the company book (XYZ Industrial) to pay off over time. This can be profitable because interest is usually set aside against corporate earnings, thereby reducing, or even eliminating, taxes.
• Most purchase transactions are much smaller; global average purchases in 2013 are $ 89 million, for example.
• The target company (XYZ Industrials here) does not have to float on the stock market; indeed most of the outgoing transactions are not an IPO.
• Purchase operations can be wrong and in such cases, losses increase with leverage, just as profit is if all goes well.

Capital growth

Capital Growth refers to equity investments, most often minority investments, in relatively mature companies seeking capital to expand or restructure operations, enter new markets or finance large acquisitions without changing business controls.

Companies looking for growth capital will often do so to finance transformational events in their lifecycle. These companies tend to be more mature than venture-funded companies, capable of generating revenues and operating profits but can not generate enough cash to finance major expansions, acquisitions or other investments. Due to this lack of scale, these companies can generally find several alternative channels to secure capital for growth, so access to growth equity can be important to pursue the expansion of necessary facilities, sales and marketing initiatives, equipment purchases, and new product development.

The main owner of the company may not want to take financial risks alone. By selling parts of the company to private equity, owners can take some value and share growth risks with partners. Capital can also be used to influence corporate balance restructuring, especially to reduce the amount of leverage (or debt) that a company has on its balance sheet.

Private investment in public equity, or PIPE, refers to a form of capital growth investment made into a public company. PIPE investments are usually made in the form of conversion or security options that are not registered for a certain period of time.

The Registered Direct, or RD, is another common financing vehicle used for capital growth. Direct listed are similar to PIPE but are sold as registered security.

Mezzanine Capital

Mezzanine capital refers to a subordinated debt or equity effect of choice that often represents the most junior portion of a company's senior capital structure of a company's general equity. This form of financing is often used by private equity investors to reduce the amount of equity capital needed to finance purchases with leverage or major expansion. Mezzanine capital, which is often used by small companies that can not access high yield markets, allows the company to borrow additional capital beyond the rate that traditional lenders are willing to provide through bank loans. As compensation for the increased risk, mezzanine debt holders require higher returns for their investment than guaranteed or other more senior lenders. Mezzanine Securities are often compiled with current income coupons.

Business capital

Venture capital or VC is a broad subcategory of private equity that refers to equity investments made, usually in less mature companies, for new seed or company launches, early development, or business expansion. Venture investment is most often found in the application of new technologies, new marketing concepts, and new products that do not have a proven track record or stable revenue stream.

Venture capital is often divided up by the company's development stage from the initial capital used for the start-up company launch to the final stage and capital growth that is often used to fund the expansion of existing businesses that generate revenue but may not be profitable or generate cash flow to finance future growth.

Employers often develop products and ideas that require substantial capital during the life cycle stages of their enterprise. Many entrepreneurs do not have enough funds to finance the project itself, and therefore they should seek outside financing. The need for venture capitalists to provide high returns to offset these investment risks makes venture funding an expensive source of capital for companies. Being able to secure financing is essential for any business, whether it is a start-up looking for venture capital or a medium company that needs more money to grow. Venture capital is best suited for businesses with large upfront capital requirements that can not be financed by cheaper alternatives such as debt. Although venture capital is often most closely related to technology, the rapidly growing health and biotech fields, venture funding has been used for other more traditional businesses.

Investors are generally committed to venture capital funds as part of a more diverse portfolio of private equity, but also to pursue greater returns that have potential to offer. However, venture capital funds have resulted in lower returns for investors over the past few years compared to other types of private equity funds, particularly purchases.

Depressed and special situations

Depressed or Special Situations is a broad category that refers to investments in the equity or debt securities of companies experiencing financial distress. The "distressed" category includes two broad sub-strategies including:

• "Depressed-for-Control" or "Loan-to-Own" strategy in which investors acquire bonds in the hope of emerging from the restructuring of the company controlling the equity of the company;
• The "Special Situation" or "Turnaround" strategy in which investors will provide debt and equity investments, often "saving financing" for companies experiencing operational or financial challenges.

In addition to this private equity strategy, hedge funds use a variety of depressed investment strategies including active trading of loans and bonds issued by depressed companies.

Secondary

Secondary investment refers to investments made on existing private equity assets. This transaction may involve the sale of private equity interest funds or a portfolio of direct investments in private companies through the purchase of these investments from existing institutional investors. Naturally, the class of private equity assets is illiquid, intended to be a long-term investment to buy and hold investors. Secondary investments provide institutional investors with the ability to increase vintage diversification, especially for new investors in asset classes. The secondary also typically experiences different cash flow profiles, reducing the j-curve effect of investing in new private equity funds. Often investments in the secondary are made through third party fund vehicles, structured similar to funding funds although many large institutional investors have bought private equity funds through secondary transactions. Sellers of private equity fund investments not only sell investments in funds but also their remaining unfunded commitments for those funds.

Other strategies

Other strategies that may be deemed to be private equities or adjacent near markets include:

• Real estate: in the context of private equity, this usually refers to the risky end of the investment spectrum including "value added" and an opportunity fund where investments are often more similar to leveraged buyouts than traditional real estate investments. Certain investors in private equity consider real estate as a separate asset class.
• Infrastructure: investments in public works (eg bridges, tunnels, toll roads, airports, public transport and other public works) are made specifically as part of privatization initiatives on the part of government entities.
Energy and Power: investments in various companies (not assets) involved in energy production and sale, including fuel extraction, manufacturing, refining and distribution (Energy) or companies involved in the production or transmission of electric power (Power).
• Merchant banking: private equity investments negotiated by financial institutions in unregistered securities either from privately owned or publicly owned companies.
• Funds: investments made in funds whose main activity is investing in other private equity funds. Funds model funds are used by investors looking for:

• Diversify but do not have sufficient capital to diversify their own portfolio.
• Access to top performing funds on the contrary over-demand
• Experience in a specific type or fund strategy before investing directly in funds in that niche
• Exposure to markets that are difficult to reach and/or appear
• Selection of superior funds with high talent funds from fund/team managers

• Royalty funds: investments that purchase a consistent revenue stream that comes from royalty payments. One of the growing parts of this category is health royalty funds, where private equity fund managers buy a stream of royalties paid by pharmaceutical companies to drug patent holders. The drug patent holder may be another company, an individual inventor, or some sort of institution, such as a research university.

Maps Private equity

History and development

Initial history and venture capital development

The seeds of the US private equity industry were planted in 1946 with the establishment of two venture capital firms: American Research and Development Corporation (ARDC) and J.H. Whitney & amp; Company. Before World War II, venture capital investment (originally known as "development capital") was primarily a domain of wealthy individuals and families. In 1901, J.P. Morgan arguably manages the first leveraged purchase of Carnegie Steel Company using private equity. The modern-day private equity, however, is credited to Georges Doriot, "the father of venture capitalism" with the founding of ARDC and INSEAD founder, with capital gained from institutional investors, to encourage private sector investment in businesses run by returnees from World War II. ARDC is credited with the first big venture capital success story when a $ 70,000 investment in 1957 at Digital Equipment Corporation (DEC) would be worth over $ 355 million after the company's initial public offering in 1968 (representing a return of more than 5,000 times the investment and the rate of return annual rate of 101%). It is generally noted that the first venture-backed startup was Fairchild Semiconductor (which produced the first commercially practical integrated circuits), funded in 1959 by what became Venrock Associates.

Origins from leveraged purchases

The first leveraged purchase is probably a purchase by McLean Industries, Inc. from the Steam Pan-Atlantic Company in January 1955 and Waterman Steamship Corporation in May 1955 Under the terms of the transaction, McLean borrowed $ 42 million and raised an additional $ 7 million through preferred stock issues. When the deal was closed, $ 20 million of Waterman's cash and assets were used to retire $ 20 million of borrowed debt. Similar to the approach used in McLean transactions, the use of publicly traded holding companies as investment vehicles to obtain investment portfolios in company assets is a relatively new trend in the 1960s popularized by the likes of Warren Buffett (Berkshire Hathaway) and Victor Posner (DWG Corporation) and later adopted by Nelson Peltz (Triarc), Saul Steinberg (Reliance Insurance) and Gerry Schwartz (Onex Corporation). This investment vehicle will use a number of similar tactics and target the same type of company as the more traditional leveraged purchases and in many ways can be considered a pioneer of the then private equity firm. In fact Posner is often credited with coining "leveraged purchases" or "LBO"

The explosion of debt purchases in the 1980s was conceived by a number of corporate financiers, notably Jerome Kohlberg Jr. and then his protagonist Henry Kravis. Working for Bear Stearns at the time, Kohlberg and Kravis along with Kravis's cousin, George Roberts embarked on a series of what they described as "bootstrap" investments. Many of these companies do not have a viable or appealing solution for their founders because they are too small to be public and the founders are reluctant to sell to competitors so sales to financial buyers can prove to be attractive. The acquisition of Orkin Gutted Company in 1964 was one of the first significant leverage purchase transactions. In the following years, three Bear Stearns bankers will complete a series of purchases including Stern Metals (1965), Incom (divisions of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973) and Thompson Wire, Eagle Motors and Barrows through their investment in Stern Metals. In 1976, tensions had awakened between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and the establishment of Kohlberg Kravis Roberts that year.

Personal equity in the 1980s

In January 1982, former US Treasury Secretary William Simon and a group of investors acquired Gibson Greetings, a greeting card manufacturer, for $ 80 million, of which only $ 1 million was rumored to have been donated by investors. In mid-1983, just sixteen months after the initial deal, Gibson completed a $ 290 million IPO and Simon earned about $ 66 million.

The success of Gibson's Speech investments attracted wider media attention to a newborn boom in overpaid purchases. Between 1979 and 1989, it was estimated there were more than 2,000 debt purchases worth over $ 250 million

During the 1980s, constituents within the acquired company and the media were perceived as "corporate raids" for many private equity investments, particularly those featuring brutal corporate takeovers, perceived reduction of assets, massive layoffs or significant corporate restructuring. Among the most notable investors to be labeled corporate robbers in the 1980s include Carl Icahn, Victor Posner, Nelson Peltz, Robert M. Bass, T. Boone Pickens, Harold Clark Simmons, Kirk Kerkorian, Sir James Goldsmith, Saul Steinberg and Asher Edelman. Carl Icahn developed a reputation as a cruel corporate robber after the brutal takeover of TWA in 1985. Many corporate robbers who once served as clients of Michael Milken, whose investment banking firm Drexel Burnham Lambert helped raise the blind capital with corporate robbers who could make legitimate efforts to take over the company and provide high-yield debt ("junk bond") for purchase financing.

One of the major purchases of the late 1980s proved to be the most ambitious and marked the high-water mark and the early sign of the end of the explosion that began almost a decade earlier. In 1989, KKR (Kohlberg Kravis Roberts) closed on a $ 31.1 billion takeover from RJR Nabisco. It was, at that time and for more than 17 years, the largest leverage purchase in history. This event is recorded in the book (and then the movie), Barbarian at the Gate: The Fall of RJR Nabisco . The KKR will eventually win in RJR Nabisco for $ 109 per share, marking a dramatic increase from the original announcement that Shearson Lehman Hutton will take a private RJR Nabisco for $ 75 per share. A series of fierce negotiations and horse trading took place that pitted the KKR against Shearson and then Forstmann Little & amp; Co Many major banking players today, including Morgan Stanley, Goldman Sachs, Salomon Brothers, and Merrill Lynch are actively involved in advising and financing the parties. After Shearson's initial offer, the TRC immediately introduced a tender offer to get RJR Nabisco for $ 90 per share - a price that allowed it to proceed without RJR Nabisco's management approval. The RJR management team, working with Shearson and the Salomon Brothers, made a bid of $ 112, a figure they believed would allow them to surpass any response by the Kravis team. The KKR's final offer of $ 109, while the lower dollar figure, was finally received by RJR Nabisco's board of directors. At $ 31.1 billion of transaction value, RJR Nabisco is by far the largest leveraged purchase in history. In 2006 and 2007, a number of leveraged purchase transactions were completed, which for the first time exceeded RJR Nabisco's rebate purchase in the case of a nominal purchase price. However, adjusted for inflation, no leverage purchases for the period 2006-2007 will surpass RJR Nabisco. In the late 1980s, the excess of the buyout market began to emerge, with the bankruptcy of several major purchases including Robert Campeau's 1988 purchase from the Federation Department Store, the purchase of Revco 1986, Walter Industries, FEB Trucking and Eaton stores. Leonard. In addition, the RJR Nabisco agreement showed signs of tension, leading to a recapitalization in 1990 involving a $ 1.7 billion contribution of new equity from the TRC. In the end, KKR lost $ 700 million to RJR.

Drexel reached an agreement with the government in which he pleaded for nolo contendere (no contest) for six serious crimes - three stock parking indictments and three counts of stock manipulation. He also agreed to pay a $ 650 million fine - at that time, the biggest fine ever imposed under securities laws. Milken left the company after its own indictment in March 1989. On February 13, 1990 after being advised by US Treasury Secretary Nicholas F. Brady, the Securities and Exchange Commission (SEC), the New York Stock Exchange and the Federal Reserve, Drexel Burnham Lambert formally filed for protection bankruptcy Chapter 11.

Age of mega-purchase 2005-2007

The combination of lower interest rates, loosening loan standards and regulatory changes for publicly traded companies (especially Sarbanes-Oxley Act) will set the stage for the largest private equity boom ever seen. Marked by Dex Media's purchase in 2002, multibillion-dollar billions of dollars of purchases could once again gain significant high-yield debt financing and larger transactions could be completed. In 2004 and 2005, large purchases once again became common, including the acquisition of Toys "R" Us, The Hertz Corporation, Metro-Goldwyn-Mayer and SunGard in 2005.

Since 2005 ends and 2006 begins, the newest "largest purchases" record has been set and exceeded several times with nine of the top ten purchases by the end of 2007 announced in an 18-month window from early 2006 to mid-2007. In 2006, private equity firms bought 654 US firms for $ 375 billion, representing 18 times the transaction rate closed in 2003. In addition, US-based private equity firm raised $ 215.4 billion in investor commitments to 322 funds, surpassing the previous record. set in 2000 by 22% and 33% higher than total fundraising in 2005 The following year, despite the turmoil in the credit markets in the summer, saw another record-breaking year of $ 302 billion of investor commitments for 415 mega-buyout funds which were completed during the 2006-2007 boom are: Equity Office Properties, HCA, Alliance Boots, and TXU.

In July 2007, the turmoil that has affected the mortgage market, spilled into leveraged finance and high-yielding debt markets. The market has been very strong during the first six months of 2007, with a very friendly development of publishers including PIK and PIK Toggle (interest is " P accessible n K ind ") and light debt agreement is widely available to finance purchases with large leverage. July and August experienced significant slowdown in the issuance rates in high yields and loan loan markets with several issuers accessing the market. Unpredictable market conditions led to significant widening of yields, accompanied by typical summer slowdowns led many firms and investment banks to put their plans to issue debt on hold until the fall. However, the expected rebound in the market after May 1, 2007 did not materialize, and the lack of market confidence prevented the transaction from pricing. By the end of September, the entire credit situation became clear when major lenders including Citigroup and UBS AG announced a major writedown due to credit losses. Financial markets with leverage stalled almost for a week in 2007. As 2007 ended and 2008 began, it was clear that loan standards had been tightened and the era of "buy-buy" had ended. Nevertheless, private equity continues to be a large and active asset class and private equity firm, with hundreds of billions of dollars of capital made from investors looking to spread capital in new and different transactions.

As a result of the global financial crisis, private equity has been the subject of increased regulation in Europe and is now subject to, inter alia, rules preventing portfolio company stripping assets and requiring notification and disclosure of information in connection with buy-out activities.

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Investment in private equity

Although the capital for private equity originally came from individual or corporate investors, in 1970, private equity became an asset class in which institutional investors allocated capital in the hope of achieving risk-adjusted returns that exceeded the possibility in public equity markets. In the 1980s, insurance companies were large private equity investors. Then, public pension funds and universities and other endowments become a more significant source of capital. For most institutional investors, private equity investments are made as part of a broad asset allocation that includes traditional assets (eg, public equity and bonds) and other alternative assets (eg, hedge funds, real estate, commodities).

Investor category

US and Canadian public and private pension schemes have invested in asset classes since the early 1980s to diversify from their core holdings (public equity and fixed income). Currently pension investments in private equity accounts for more than one third of all funds are allocated to asset classes, above other institutional investors such as insurance companies, endowments, and state wealth funds.

Direct vs. investment not directly

Most institutional investors do not invest directly in private companies, without the expertise and resources needed to develop and monitor investments. Instead, institutional investors will invest indirectly through private equity funds. Certain institutional investors have the scale required to develop a diversified portfolio of private equity funds themselves, while others will invest through funding to enable a more diversified portfolio than a single investor can build.

Investment period

Return on private equity investments is created through one or a combination of three factors including: debt payments or cash accumulation through cash flow from operations, operational improvements that increase revenue over the life of the investment and double expansion, business sales to a higher price than originally paid. A key component of private equity as an asset class for institutional investors is that investment is usually realized after some period of time, which will vary depending on the investment strategy. Private equity investments are usually realized through one of the following ways:

• an IPO (IPO ) - the company's stock is offered to the public, usually providing a partial realization to the financial sponsor as well as a public market that can later sell additional shares;
• a merger or acquisition - the company is sold with cash or shares in another company;
• recapitalization - cash is distributed to shareholders (in this case financial sponsors) and private equity funds either from cash flow generated by the company or through an increase in debt or other securities to fund distribution.

The owners of large institutional assets such as pension funds (with the usual long-term liabilities), insurance companies, state assets and national reserve funds have a lower likelihood of facing liquidity shocks in the medium term, and thus may have the required long-term characteristics. private equity investment.

The median horizon for LBO transactions is 8 years.

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Liquidity in private equity markets

Secondary market private equity (also often called private equity secondaries) refers to the purchase and sale of pre-existing investor commitments to private equity and other alternative investment funds. Private equity investment sellers not only sell investments in funds but also commit no funds to them remaining for those funds. Naturally, the class of private equity assets is illiquid, intended to be a long-term investment for investors who buy and hold. For most private equity investments, there is no public market listed; However, there is a strong and mature secondary market available for sellers of private equity assets.

Increasingly, the secondary is considered an asset class different from the cash flow profile that is not correlated with other private equity investments. As a result, investors allocate capital for secondary investments to diversify their private equity programs. Driven by strong demand for private equity exposures, large amounts of capital have been committed to secondary investments from investors seeking to increase and diversify their personal equity exposures.

Investors seeking access to private equity have been restricted to investments with structural barriers such as long locking periods, lack of transparency, unlimited leverage, concentrated holdings of illiquid securities and high minimum investments.

Secondary transactions can generally be divided into two basic categories:

• Limited Partnership Interest Sales - The most common secondary transactions, this category includes the sale of investor interest in private equity funds or a portfolio of interests in various funds through the transfer of limited investor interest in funds ( s). Almost all types of private equity funds (eg, including purchases, growth equity, venture capital, mezzanine, depressed, and real estate) can be sold in the secondary market. The transfer of limited partnership interests will usually allow investors to receive some liquidity for the funded investment as well as the release of the remaining unfunded liabilities for the funds.
• Direct Interest Sale - Secondary or Secondary Instruction Synthetic, this category refers to the sale of a portfolio of direct investments in an operating company, rather than the limited partnership interest in investment funds. This portfolio has historically come from corporate development programs or major financial institutions.

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Private equity company

According to the updated 2017 ranking made by the private industry magazine Private Equity International (published by PEI Media called PEI 300), the world's largest private equity firm today is The Blackstone Group based on the amount of private investment capital raised by the five-year window. As rated by PEI 300, the world's 10 largest private equity firms are:

1. The Blackstone Group
2. Kohlberg Kravis Roberts
3. Carlyle Group
4. TPG Capital
5. Warburg Pincus
6. Advent International Corporation
7. Apollo Global Management
8. EnCap Investment
9. Neuberger Berman
10. CVC Capital Partners

Because private equity firms are constantly in the process of raising, investing, and distributing their private equity funds, the capital gained can often be the easiest to measure. Other metrics may include the total value of the firm purchased by the company or the approximate size of the company's active portfolio plus the capital available for new investments. Like a size-focused list, the list gives no indication of the relative investment performance of this fund or manager.

In addition, Preqin (formerly known as Private Equity Intelligence), an independent data provider, is ranked 25th largest private equity investment manager. Among the major companies in the rankings are AlpInvest Partners, Ardian (formerly AXA Private Equity), AIG Investments, and Goldman Sachs Capital Partners. Invest Europe publishes an annual book analyzing industry trends derived from data disclosed by over 1,300 private European equity funds. Finally, websites like AskIvy.net provide a list of private equity firms based in London.

Versus hedge fund

The investment strategy of private equity firms is different from hedge funds. Typically, private equity investment groups are geared toward long-lasting, years of investment strategies in illiquid assets (whole corporations, large-scale real estate projects, or other merchandise that are not easily converted into cash) where they have control and influence greater over operations or asset management to influence their long-term returns. Hedge funds typically focus on short- or medium-term liquid securities that are faster converted into cash, and they have no direct control over the business or assets in which they invest. Both private equity firms and hedge funds often specialize in certain types of investments and transactions. The specialization of private equity is usually in the management of certain industrial sector assets while specializing in hedge funds in industrial sector risk management. Private equity strategies can include wholesale purchases from private companies or a series of assets, mezzanine financing for new projects, capital growth investments in existing businesses or leveraged buyouts from publicly owned assets that turn them into private controls. Finally, private equity firms simply take the buy position, because short selling is not possible in this asset class.

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Private equity funds

Private equity fundraising refers to the actions of private equity firms seeking capital from investors for their funds. Typically investors will invest in a special fund managed by the company, being a limited partner in funds, rather than investors in the company itself. As a result, an investor will only benefit from the investment made by the company where the investment is made from a particular fund that has been invested.

• Funds. It is a private equity fund that invests in other private equity funds to provide investors with lower risk products through exposure to a large number of frequent vehicles of various types and regional focuses. Funds accounted for 14% of the global commitments made to private equity funds in 2006.
• Individuals with substantial net worth. Substantial wealth values ​​are often required by investors by law, as private equity funds are generally less regulated than ordinary mutual funds. For example, in the US, most of the funds require potential investors to qualify as accredited investors, requiring $ 1 million in net worth, $ 200,000 in individual income, or $ 300,000 shared revenue (with spouses) for two years documented and expectations that the income level will continue.

Since fundraising has grown over the past few years, so has the number of investors in the average fund. In 2004 there were 26 investors in the average private equity fund, this figure has now grown to 42 according to Preqin ltd. (formerly known as Private Equity Intelligence).

Private equity fund managers will also invest in their own vehicles, typically providing between 1-5% of the total capital.

Often private equity fund managers will use the services of external fundraising teams known as placement agencies to raise capital for their vehicles. The use of placement agencies has grown over the last few years, with 40% of the funds closed in 2006 using their services, according to Preqin ltd. The placement agent will approach potential investors on behalf of the fund manager, and will usually take a fee of about 1% of the commitments they can accumulate.

The amount of time used by private equity firms to increase capital varies depending on the interest rate among investors, which is determined by the current market conditions as well as the track record of the previous funds submitted by the company concerned. Companies can spend at least one or two months raise capital when they are able to achieve the targets they set for their funds with relative ease, often through getting commitments from existing investors in their previous funds, or where strong past performance leads to a level that strong investor interest. Other managers may consider fundraising much longer, with managers of less popular types of funds (such as US and European venture fund managers in the current climate) finding more difficult fundraising processes. There has been no funding to spend for two years on the road looking for capital, although the majority of fund managers will complete fundraising in the nine months to fifteen months.

Once the fund has reached the fundraising target, it will have a final closing. After this point it is usually not possible for new investors to invest in funds, unless they buy interest in funds in the secondary market.

Industry size

The industrial situation around the end of 2011 is as follows.

Private-managed equity assets may exceed $ 2.0 trillion by the end of March 2012, and available funds for investment amount to $ 949bn (about 47% of total managed assets).

Some $ 246bn of private equity was invested globally in 2011, down 6% in the previous year and about two-thirds below peak activity in 2006 and 2007. After a strong start, transaction activity slowed in the second half of 2011 due to top worries the global economy and the debt crisis in Europe. There is $ 93bn in investment during the first half of this year as the slowdown continues through 2012. This fell by a quarter in the same period of the previous year. Private equity buybacks generate about 6.9% of M & amp; A global in 2011 and 5.9% in the first half of 2012. It fell 7.4% in 2010 and well below the all-time high of 21% in 2006.

Global outflow reached $ 252bn in 2011, practically unchanged from the previous year, but rose in 2008 and 2009 as private equity firms tried to take advantage of improved market conditions early in the year to realize investment. Exit activity however, has lost momentum after a peak of $ 113bn in the second quarter of 2011. TheCityUK estimates total activity out of some $ 100bn in the first half of 2012, also down in the same period in the previous year.

The fundraising environment remained stable for the third year running in 2011 with $ 270bn in new funds rising, slightly down from the previous year's total. Approximately $ 130bn of funds raised in the first half of 2012, down about a fifth in the first half of 2011. The average time for funds to reach the final closing fell to 16.7 months in the first half of 2012, from 18.5 months in 2011. Private equity funds available for investment ("dry powder") totaled $ 949 billion at the end of q1-2012, down about 6% in the previous year. Including unrealized funds in existing investments, managed private equity funds may reach more than $ 2.0 trillion.

Public pensions are the main source of capital for private equity funds. More and more, sovereign wealth funds grow as an investor class for private equity.

Performance of private equity funds

Because disclosure is limited, studying returns to private equity is relatively difficult. Unlike mutual funds, private equity funds do not need to disclose performance data. And, when they invest in a private company, it's hard to check the underlying investment. It is challenging to compare the performance of private equity with the performance of public equity, especially as private equity fund investments are withdrawn and returned over time when investments are made and then realized.

A frequently quoted academic paper (Kaplan and Schoar, 2005) shows that net-of-fees returns to PE funds roughly proportional to S & amp; P 500 (or even slightly below). This analysis can really overestimate the results because it relies on voluntarily reported data and therefore suffers from a survival bias (ie failed funds will not report data). It should also be noted that this return is not adjusted for risk. A more recent paper (Harris, Jenkinson and Kaplan, 2012) finds that the average purchase refund in the US has actually exceeded the public market. These findings are supported by previous work, using different data sets (Robinson and Sensoy, 2011).

Commentators argue that standard methodologies are needed to present an accurate performance picture, to make individual private equity funds comparable and so that the overall asset class can be matched with the public market and other types of investments. It also states that PE fund managers manipulate data to present themselves as powerful players, which makes it even more important to standardize the industry.

Two other findings in Kaplan and Schoar (2005): First, there is considerable variation in performance across PE funds. Second, unlike the mutual fund industry, there appears to be persistence of performance in PE funds. That is, PE funds that perform well during one period tend to also perform well in the next period. Persistence is stronger for VC firms than for LBO companies.

The implementation of the Freedom of Information Act (FOIA) in certain countries in the United States has made certain performance data more readily available. In particular, FOIA has obliged certain public authorities to disclose private equity performance data directly on their website.

In the United Kingdom, the second largest market for private equity, more data has been available since the publication of David Walker's Guide to Disclosure and Transparency in Personal Equity in 2007.

src: www.protrak.com

Debate

Record private equity

There is a debate surrounding the difference between private equity and foreign direct investment (FDI), and whether to treat them separately. The difference is blurred because private equity does not enter the country through the stock market. Private equity generally flows to unregistered companies and to firms where the percentage of shares is less than the stock of the promoter or investor (also known as free floating stock). The main point of contention is that FDI is only used for production, whereas in the case of private equity investors can recover their money after the revaluation period and invest in other financial assets. Currently, most countries report private equity as part of FDI.

Cognitive bias

Source of the article : Wikipedia