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Private Equity/Venture Capital

  • PRIVATE EQUITY
  • Definition of private equity Private equity capital is equity capital that is not quoted on a public exchange. Private equity investors or funds make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors and can be used to fund start-ups (venture capital), make acquisitions (growth equity, buyout), or to strengthen a balance sheet (special situations). Such investments are commonly made by private equity firms, venture capital firms or “angel investors”. Investments are generally made through a fund partnership having the following characteristics:

  • How does a private equity fund work?
  • The fund’s manager, or general partner, establishes a limited partnership agreement that sets forth the terms and conditions governing investment in the fund. Investors in the fund, or limited partners, fund capital calls up to their agreed commitment level for the duration of the investment period (4-6 years). Once a portfolio investment is realized – i.e. the underlying company is sold to a financial buyer, a strategic investor or gone public via an IPO – the fund distributes proceeds back to the limited partners.

  • Private equity strategies
  • Private equity funds typically employ a transformational, value-added, active investment strategy. However, diverse investment strategies can be used depending on where the company is in its life cycle. Each stage of a company’s life cycle exhibits a certain risk profile and requires a specific set of skills from the general partner. There are three principal financing stages in a company’s life cycle.

  • Growth capital
  • Growth capital refers to equity investments, most frequently minority investments, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business. Buyout investments consist in acquiring a stake in a private company (non-listed or public to be taken private) with the intention to exercise influence on the company. Buyout funds usually invest in mature, established companies with a strong market position. The buyout manager draws up, together with the company’s management, a business plan to develop the company further, either organically and/or by applying a “buy and build” strategy. This process consists of acquiring a company of a significant size, and then adding smaller companies to the initial acquisition in order to create a significant player in the industry. Buyout managers will support the company’s management in its acquisition plan, negotiating possible debt financing and efficiently consolidating the business. The plan may also include some cost restructuring measures, the disposal of non-core assets or the sale of unprofitable divisions. Buyout transactions make sense when buyout capitalists believe they can extract value by holding and managing a company for a period of time and exiting it after significant value has been created. Special situations Special situations funds invest in restructuring, turnaround, distressed debt for control and any other unusual circumstances that a company can face. This category includes investments in equity and equity related instruments as well as debt instruments.