:

Priva te Eq

uity How

it Wo rks?

Private e quity fun ds are set up as li mited .

. partnershi ps .

These lim ited partn erships ar e controll ed by .

private e quity co mpanies t .

partner in the limit .hat are th e general .

ed partner ship .

The priva te equity company encourag es .

individua ls and ins titutions t .

private eq uity fund .o invest i n the .

. This way the invest ors beco ..

me limite d partner s .

though th e general partner c ontrols th e .

. company managem ent .

.

When th e general partner th inks that .

a particul ar . investme nt is feasi .

.ble it ask s the limi ted .

partner to invest th e amount it guarant eed .

The gener al partner chooses t .

.he invest ment port folio .

of the par tnership while the limited p artner .

provides funds for investing ..

. The limit ed partne r or inves ..

through s ales merg .tor in tur n profits ..

.ers recapi talization or initial .

public off ering .

rivate equity. which are all complementary to investing in traditional securities through regulated markets or stock exchanges. In the USA “venture capital” refers only to investments in early stage and expanding companies. strategies and asset classes. Some commentators use the term “private equity” to refer only to the buy-out and buy-in investment sector. consists of several investment tehniques. use the term “venture capital” to cover all stages. as an asset class. i.e. encompassing both “venture capital” (the seed to expansion stages of investment) and management buy-outs and buy-ins. . Others. synonymous with “private equity”. in Europe but not the USA. To avoid confusion. the term “private equity” is used by NPEP to describe the industry as a whole.

Most institutional investors..Investors provide private equity capital in the hopes of achieving risk adjusted returns that exceed those possible in the public equity markets and will typically include private equity as part of a broad asset allocation that includes traditional assets (e. do not invest directly in privately held companies. Instead. while others will invest through fund of funds to allow a more diversified portfolio than an investor could construct. Certain institutional investors have the scale necessary to develop a diversified portfolio of private equity funds themselves. . institutional investors will invest indirectly through a private equity fund. lacking the expertise and resources necessary to structure and monitor the investment.g. public equity and bonds).

for the launch. The investing cycle for most funds is generally three to five years. Venture Capital is often subdivided by the stage of development of the company ranging from early stage capital used for the launch of start- . Forms of Private Equity There are a wide array of types and styles of private equity and the term private equity has different connotations in different countries. Private equity investments can be divided into the following main categories:  Venture capital: a broad subcategory of private equity that refers to equity investments made. after which the focus is managing and making follow-on investments in an existing portfolio. early development. typically in less mature companies.Most private equity funds have a fixed life of 10 years. or expansion of a business. with the possibility of a few years of extensions to allow for private companies still seeking liquidity.

including fuel extraction. Often these investments are structured similar to a fund of funds. or a company where value can be unlocked as a result of a one-time opportunity (e. These categories can refer to a number of strategies.  Secondary investments: refer to investments made in existing private equity assets including private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors. most often minority investments. LBO or Buyout: refers to a strategy of making equity investments as part of a transaction in which a company. The main advantages of private equity over debt financing are:  Medium to long-term investment horizon. manufacturing..  Mezzanine capital: refers to subordinated debt or preferred equity securities that often represents the most junior portion of a company's capital structure that is senior to the company's common equity. This is made possible by the provision of a combination of capital and experienced personal input from private equity executives.up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth. bridges. refining and distribution (Energy) or companies engaged in the production or transmission of electrical power. business unit or business assets are acquired from the current shareholders typically with the use of financial leverage.g.  Growth capital: refers to equity investments. toll roads.  Leveraged buyout.g. The companies involved in these transactions are typically more mature and generate operating cash flows. Other strategies that can be considered private equity or a close adjacent market include:  Distressed or Special situations: can refer to investments in equity or debt securities of a distressed company. in more mature companies that are looking for capital to expand or restructure operations. which sets it apart from other forms of finance. .  Infrastructure: investments in various public works (e. public transportation and other public works) that are made typically as part of a privatization initiative on the part of a government entity. some of which straddle the definition of private equity. tunnels.  Real Estate: in the context of private equity this will typically refer to the riskier end of the investment spectrum including "value added" and opportunity funds where the investments often more closely resemble leveraged buyouts than traditional real estate investments. Certain investors in private equity consider real estate to be a separate asset class. airports.  Energy and Power: investments in a wide variety of companies (rather than assets) engaged in the production and sale of energy. enter new markets or finance a major acquisition without a change of control of the business. a change in government regulations or market dislocation). Advantages & Disadvantages Private equity backed companies have been shown to grow faster than other types of companies..

the better the returns all investors will receive.  Entrepreneurs have to give up some of their company’s shares to a private equity investor. or  The company achieving a stock market listing (IPO). generally achieving its principle return through realizing a capital gain through an “exit” which may include:  Selling their shares back to the management.  If the business runs into difficulties. with practical advice and expertise (as required) to assist your business success. from the entrepreneur’s perspective could be seen in that:  It is a lengthy process since private equity managers conduct detailed market. or  The private equity managers have control over the timing of a sale of (a part of) the business.  Provides a solid. Debt which is secured in this way and which has a higher priority for repayment than that of general unsecured creditors is referred to as “senior debt”. the private equity firm will work hard to ensure that the company is turned around. the lender can put business into receivership. which could take several months before they make final decisions on investing. financial. as capital repayment. . and stand to lose their investment. i.e. On the other hand.  Good for cash flow. therefore.  Selling the shares to another investor (such as another private equity firm). private equity is not secured on any assets although part of the non-equity funding package provided by the private equity firm may seek some security.  The returns to the private equity investor depend on the business’ growth and success. often faces the risk of failure just like the other shareholders. As a last resort. capital base to meet your future growth and development plans. The more successful the company is. if the company defaults on its repayments. environmental and management due diligence. control. some of the disadvantages of private equity capital. and  A true business partner. sharing in your risks and rewards.  If the business fails.  A trade sale (the sale of company shares to another investor /strategic partner/). A provider of debt (generally a bank) is rewarded by interest and capital repayment of the loan and it is usually secured either on business assets or owner’s/shareholder’s personal assets. By contrast. dividend and interest costs (if relevant) are tailored to the company’s needs and to what it can afford. private equity investors will rank alongside other shareholders. The private equity firm is an equity business partner and is rewarded by the company’s success. Committed until “exit”. legal. which may lead to the liquidation of any assets. The private equity firm. after the banks and other lenders. flexible.