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Types of Company Structure PDF
Types of Company Structure PDF
Contents-
1. Family Offices
2. Holding Company
3. Private Equity
4. Understanding Private Equity- PE
5. Hedge Fund
6. Hedge Fund vs Private Equity Fund: What’s the Difference ?
7. Asset Managment Company (AMC)
1. Family Offices
Family offices are typically either defined as single family offices or multi-
family offices – sometimes referred to as MFOs. Single family offices serve
just one ultra-affluent family while multi-family offices are more closely
related to traditional private wealth management practices, seeking to
build their business upon serving many clients. Multifamily offices are
more prevalent due to economies of scale that allow for cost sharing
among the clientele.
KEY TAKEAWAYS
Family offices are full-service private wealth management services
that serve just one or a small number of ultra-high-net-worth
families.
Beyond basic financial services, family offices also provide concierge
services, planning, charitable giving advice, and other
comprehensive services.
Single family offices serve just one individual and their family, while
multi-family offices serve a small few and may benefit from
economies of scale.
Lifestyle Management
Many family offices furthermore act as a personal concierge for families,
handling their personal affairs and catering to their lifestyle needs. This
could include conducting background checks on personal and business
staff; providing personal security for home and travel; aircraft and yacht
management; travel planning and fulfillment; and streamlining business
affairs.
2. Holding Company
What Is a Holding Company?
A holding company is a parent corporation, limited liability company, or
limited partnership that owns enough voting stock in another company,
that it can control that company's policies and oversee its management
decisions.
KEY TAKEAWAYS
A holding company is a parent corporation, limited liability
company, or limited partnership that owns enough voting stock in
another company so that it can control that company's policies and
oversee its management decisions.
Although a holding company owns the assets of other companies, it
merely maintains oversight capacities and therefore does not
actively participate in running a business's day-to-day operations.
Holding companies enjoy the benefit of protection from losses,
where if a subsidiary company goes bankrupt, its creditors cannot
legally pursue the holding company for remuneration.
This tactic serves to limit the financial and legal liability exposure of the
holding company and of the various subsidiaries. It may also depress a
corporation's overall tax liability by strategically basing certain parts of its
business in jurisdictions that have lower tax rates.
Other Advantages of Holding Companies
Holding companies also let individuals protect their personal assets,
because those assets are technically held by the corporation, and not by
the person, who is consequently shielded from debt liabilities, lawsuits,
and other risks.
3. Private Equity
What is Private Equity?
Private equity is an alternative investment class and consists of capital
that is not listed on a public exchange. Private equity is composed of
funds and investors that directly invest in private companies, or that
engage in buyouts of public companies, resulting in the delisting of public
equity. Institutional and retail investors provide the capital for private
equity, and the capital can be utilized to fund new technology, make
acquisitions, expand working capital, and to bolster and solidify a balance
sheet.
A private equity fund has Limited Partners(LP), who typically own 99
percent of shares in a fund and have limited liability, and General
Partners (GP), who own 1 percent of shares and have full liability. The
latter are also responsible for executing and operating the investment.
In the years since the financial crisis, private credit funds have accounted
for an increasing share of business at private equity firms. Such funds
raise money from institutional investors, like pension funds, to provide a
line of credit for companies that are unable to tap the corporate bond
markets. The funds have shorter time periods and terms as compared to
typical PE funds and are among the less regulated parts of the financial
services industry. The funds, which charge high interest rates, are also
less affected by geopolitical concerns, unlike the bond market.
Real Estate Private Equity: There was a surge in this type of funding
after the 2008 financial crisis crashed real estate prices. Typical
areas where funds are deployed are commercial real estate and real
estate investment trusts (REIT). Real estate funds require higher
minimum capital for investment as compared to other funding
categories in private equity. Investor funds are also locked away for
several years at a time in this type of funding. According to research
firm Preqin, real estate funds in private equity are expected to clock
in a 50 percent growth by 2023 to reach a market size of $1.2
trillion.
Positions in a private equity firm are highly sought after and for good
reason. For example, consider a firm has $1 billion in assets under
management (AUM). This firm, like the majority of private equity firms, is
likely to have no more than two dozen investment professionals. The 20
percent of gross profits generates millions in firm fees; as a result, some
of the leading players in the investment industry are attracted to
positions in such firms. At a mid-market level of $50 to $500 million in
deal values, associate positions are likely to bring salaries in the low six
figures. A vice president at such a firm could potentially earn close to
$500,000, whereas a principal could earn more than $1 million.
KEY TAKEAWAYS
Private equity is an alternative form of private financing, away from
public markets, in which funds and investors directly invest in
companies or engage in buyouts of such companies.
Private equity firms make money by charging management and
performance fees from investors in a fund.
Among the advantages of private equity are easy access to alternate
forms of capital for entrepreneurs and company founders and less
stress of quarterly performance. Those advantages are offset by the
fact that private equity valuations are not set by market forces.
Private equity can take on various forms, from complex leveraged
buyouts to venture capital.
The fee structure for private-equity firms varies, but it typically consists of
a management fee and a performance fee (in some cases, a yearly
management fee of 2% of assets managed and 20% of gross profits upon
sale of the company). How firms are incentivized can vary considerably.
These types of firms may have an extensive contact list and "C-level"
relationships, such as CEOs and CFOs within a given industry, which can
help increase revenue, or they may be experts in realizing operational
efficiencies and synergies. If an investor can bring in something special to
a deal that will enhance the company's value over time, such an investor
is more likely to be viewed favorably by sellers. It is the seller who
ultimately chooses whom they want to sell to or partner with.
In the case of private-equity firms, the funds they offer are only accessible
to accredited investors and may only have a limited number of investors,
while the fund's founders will often take a rather large stake in the firm as
well. However, some of the largest and most prestigious private equity
funds trade their shares publicly. For instance, the Blackstone Group (BX)
trades on the NYSE and has been involved in the buyouts of companies
such as Hilton Hotels and SunGard.
portfolio oversight
Deal origination involves creating, maintaining and developing
relationships with mergers and acquisitions (M&A) intermediaries,
investment banks and similar transaction professionals to secure both
high-quantity and high-quality deal flow. Deal flow refers to prospective
acquisition candidates referred to private-equity professionals for
investment review. Some firms hire internal staff to proactively identify
and reach out to company owners to generate transaction leads. In a
competitive M&A landscape, sourcing proprietary deals can help ensure
that the funds raised are successfully deployed and invested.
It is important to note that investment banks often raise their own funds,
and therefore may not only be a deal referral, but also a competing
bidder. In other words, some investment banks compete with private-
equity firms in buying up good companies.
Leveraged buyouts are exactly how they sound: a target firm is bought
out by a private equity firm (or as a part of a larger group of firms). The
purchase is financed (or leveraged) through debt, which is collateralized
by the target firm's operations and assets. The acquirer (the PE firm)
seeks to purchase the target with funds acquired through the use of the
target as a sort of collateral.
Investing in Upside
One popular exit strategy for private equity involves growing and
improving a middle-market company and selling it to a large corporation
(within a related industry) for a hefty profit. The bigninvestment banking
professionals cited above typically focus their efforts on deals with
enterprise values worth billions of dollars. However, the vast majority of
transactions reside in the middle market ($50 million to $500 million
deals) and lower-middle market ($10 million to $50 million deals).
Because the best gravitate toward the larger deals, the middle market is a
significantly underserved market: That is, there are significantly more
sellers than there are highly seasoned and positioned finance
professionals with the extensive buyer networks and resources to
manage a deal (for middle-market company owners).
There are several private equity investment firms, aka called business
development companies, who offer publicly traded stock, giving average
investors the opportunity to own a slice of the private equity pie. Along
with the Blackstone Group (mentioned above), examples of these stocks
are Apollo Global Management LLC (APO), Carlyle Group (CG) and
Kohlberg Kravis Roberts/ KKR & Co. (KKR), best known for its massive
leveraged buyout of RJR Nabisco in 1989.
Mutual funds have restrictions in terms of buying private equity due to
the SEC's rules regarding illiquid securities holdings, but they can invest
indirectly by buying these publicly listed private equity companies, too;
these mutual funds are typically referred to as funds of funds.
Additionally, average investors can purchase shares of an exchange-
traded fund (ETF) that holds shares of private equity companies, such as
ProShares Global Listed Private Equity ETF (PEX).
As the industry attracts the best and brightest in corporate America, the
professionals at private-equity firms are usually successful in deploying
investment capital and in increasing the values of their portfolio
companies. However, there is also fierce competition in the M&A
marketplace for good companies to buy. As such, it is imperative that
these firms develop strong relationships with transaction and services
professionals to secure strong deal flow.
5. Hedge Fund
What Is a Hedge Fund?
Hedge funds are alternative investments using pooled funds that employ
different strategies to earn active return, or alpha, for their investors.
Hedge funds may be aggressively managed or make use of derivatives
and leverage in both domestic and international markets with the goal of
generating high returns (either in an absolute sense or over a specified
market benchmark). It is important to note that hedge funds are generally
only accessible to accredited investors as they require less SEC
regulations than other funds. One aspect that has set the hedge fund
industry apart is the fact that hedge funds face less regulation than
mutual funds and other investment vehicles.
Understanding Hedge Funds
Each hedge fund is constructed to take advantage of certain identifiable
market opportunities. Hedge funds use different investment strategies
and thus are often classified according to investment style. There is
substantial diversity in risk attributes and investments among styles.
Legally, hedge funds are most often set up as private investment limited
partnerships that are open to a limited number of accredited investors
and require a large initial minimum investment. Investments in hedge
funds are illiquid as they often require investors to keep their money in
the fund for at least one year, a time known as the lock-up period.
Withdrawals may also only happen at certain intervals such as quarterly
or bi-annually.
KEY TAKEAWAYS
Hedge funds are alternative investment vehicles that employ a
variety of strategies to generate alpha for their accredited investor
clients.
They are more expensive as compared to conventional investment
instruments because they have a Two And Twenty fee structure,
meaning they charge two percent for asset management and take
20% of overall profits as fees.
They have had an exceptional growth curve in the last twenty years
and have been associated with several controversies.
The industry was relatively quiet for more than two decades until a 1986
article in Institutional Investor touted the double-digit performance of
Julian Robertson's Tiger Fund. With a high-flying hedge fund once again
capturing the public's attention with its stellar performance, investors
flocked to an industry that now offered thousands of funds and an ever-
increasing array of exotic strategies, including currency trading and
derivatives such as futures and options.
The number of operating hedge funds has grown as well. There were
around 2,000 hedge funds in 2002. Estimates vary about the number of
hedge funds operating today. This number had crossed 10,000 by the end
of 2015. However, losses and underperformance led to liquidations. By
the end of 2017, there are 9754 hedge funds according to research firm
Hedge Fund Research.
Key Characteristics
They often employ leverage: Hedge funds will often use borrowed
money to amplify their returns. As we saw during the financial crisis
of 2008, leverage can also wipe out hedge funds.
That said, there are mechanisms put in place to help protect those who
invest in hedge funds. Often times, fee limitations such as high-water
marks are employed to prevent portfolio managers from getting paid on
the same returns twice. Fee caps may also be in place to prevent
managers from taking on excess risk.
This guideline will also reveal funds with much higher expected returns,
such as global macro funds, long-biased long/short funds, and several
others. But if these aren't the types of funds the investor is looking for,
then they must also establish a guideline for standard deviation. Once
again, we will use the WGBI to calculate the standard deviation for the
index over the previous five years. Let's assume we add 1% to this result,
and establish that value as the guideline for standard deviation. Funds
with a standard deviation greater than the guideline can also be
eliminated from further consideration.
Now an investor has two guidelines that all funds need to meet for
further consideration. However, applying these two guidelines still leaves
too many funds to evaluate in a reasonable amount of time. Additional
guidelines need to be established, but the additional guidelines will not
necessarily apply across the remaining universe of funds. For example,
the guidelines for a merger arbitrage fund will differ from those for a
long-short market-neutral fund.
The threshold for each guideline may be the result for each metric that
meets or exceeds the 50th percentile. An investor can loosen the
guidelines by using the 60th percentile or tighten the guideline by using
the 40th percentile. Using the 50th percentile across all the metrics usually
filters out all but a few hedge funds for additional consideration. In
addition, establishing the guidelines this way allows for flexibility to adjust
the guidelines as the economic environment may impact the absolute
returns for some strategies.
Standard deviation
Downside deviation
These guidelines will help eliminate many of the funds in the universe
and identify a workable number of funds for further analysis.
Hedge fund managers are compensated with this carried interest; their
income from the fund is taxed as a return on investments as opposed to
a salary or compensation for services rendered. The incentive fee is taxed
at the long-term capital gains rate of 20% as opposed to ordinary income
tax rates, where the top rate is 39.6%. This represents significant tax
savings for hedge fund managers.
This business arrangement has its critics, who say that the structure is a
loophole that allows hedge funds to avoid paying taxes. The carried
interest rule has not yet been overturned despite multiple attempts in
Congress. It became a topical issue during the 2016 primary election.
The Galleon Group managed over $7 billion at its peak before being
forced to close in 2009. The firm was founded in 1997 by Raj Rajaratnam.
In 2009, federal prosecutors charged Rajaratnam with multiple counts of
fraud and insider trading. He was convicted on 14 charges in 2011 and
began serving an 11-year sentence. Many Galleon Group employees were
also convicted in the scandal.
In March 2012, the Jumpstart Our Business Startups Act (JOBS Act) was
signed into law. The basic premise of the JOBS Act was to encourage
funding of small businesses in the U.S. by easing securities regulation.
The JOBS Act also had a major impact on hedge funds: In September
2013, the ban on hedge fund advertising was lifted. In a 4-to-1 vote, the
SEC approved a motion to allow hedge funds and other firms that create
private offerings to advertise to whomever they want, but they still can
only accept investments from accredited investors. Hedge funds are often
key suppliers of capital to startups and small businesses because of their
wide investment latitude. Giving hedge funds the opportunity to solicit
capital would in effect help the growth of small businesses by increasing
the pool of available investment capital.
There are many reasons why hedge funds have struggled in recent years.
These reasons run the gauntlet from geopolitical tensions around the
globe to an over-reliance among many funds on particular sectors,
including technology, and interest rate hikes by the Fed. Many prominent
fund managers have made highly-publicized bad bets which have cost
them not only monetarily but in terms of their reputations as savvy fund
leaders, too.
However, the firm posted losses of 34 percent, its worst year ever, in 2018
on the back of shorts against Amazon, which recently became the second
trillion dollar company after Apple, and holdings in General Motors, which
posted a less-than-stellar 2018.
Notably, the overall size of the hedge fund industry (in terms of assets
under management) has not declined significantly during this period and
has continued to grow. There are new hedge funds launching all the time,
even as several of the past 10 years have seen record numbers of hedge
fund closures.
Founded in 2001 by David Siegel and John Overdeck, New York's Two
Sigma Investments is near the top of the list of hedge funds by AUM, with
more than $37 billion in managed assets. The firm was designed to not
rely on a single investment strategy, allowing it to be flexible along with
shifts in the market.
One of the most popular hedge funds in the world is James H. Simon's
Renaissance Technologies. The fund, with $57 billion in AUM, was
launched in 1982, but it has revolutionized its strategy along with changes
in technology in recent years. Now, Renaissance is known for systematic
trading based on computer models and quantitative algorithms. Thanks
to these approaches, Renaissance has been able to provide investors with
consistently strong returns, even in spite of recent turbulence in the
hedge fund space more broadly.
Ray Dalio's Bridgewater Associates remains the largest hedge fund in the
world, with just under $125 billion in AUM as of mid-2018. The
Connecticut-based fund employs about 1700 people and focuses on a
global macro investing strategy. Bridgewater counts foundations,
endowments, and even foreign governments and central banks among its
clientele.
Hedge Fund
Hedge funds are alternative investments that use pooled funds and
employ a variety of strategies to earn returns for their investors. The aim
of a hedge fund is to provide the highest investment returns possible as
quickly as possible. To achieve this goal, hedge fund investments are
primarily in highly liquid assets, enabling the fund to take profits quickly
on one investment and then shift funds into another investment that is
more immediately promising. Hedge funds tend to use leverage, or
borrowed money, to increase their returns. But such strategies are risky
—highly leveraged firms were hit hard during the 2008 financial crisis.
In terms of costs, hedge funds are pricier to invest in than mutual funds
or other investment vehicles. Instead of charging an expense ratio only,
hedge funds charge both an expense ratio and a performance fee.
Private Equity Fund
Private equity funds more closely resemble venture capital firms in that
they invest directly in companies, primarily by purchasing private
companies, although they sometimes seek to acquire controlling interest
in publicly traded companies through stock purchases. They frequently
use leveraged buyouts to acquire financially distressed companies.
To achieve their aims, private equity funds usually have, in addition to the
fund manager, a group of corporate experts who can be assigned to
manage the acquired companies. The very nature of their investments
requires their more long-term focus, looking for profits on investments to
mature in a few years rather having the short-term quick profit focus of
hedge funds.
Key Differences
Since hedge funds are focused on primarily liquid assets, investors can
usually cash out their investments in the fund at any time. In contrast, the
long-term focus of private equity funds usually dictates a requirement
that investors commit their funds for a minimum period of time, usually
at least three to five years, and often from seven to 10 years.
KEY TAKEAWAYS
Hedge funds and private equity funds appeal to high-net-worth
individuals.
Both types of funds involve paying managing partners basic fees
plus a percentage of profits.
Hedge funds are alternative investments that use pooled money
and a variety of tactics to earn returns for their investors.
Private equity funds invest directly in companies, by either
purchasing private firms or buying a controlling interest in publicly
traded companies.
KEY TAKEAWAYS
An asset management company (AMC) invests pooled funds from
clients into a variety of securities and assets.
AMCs range from personal money managers, handling high-net-
worth individual accounts, to large investment companies
sponsoring mutual funds.
AMC managers are compensated via fees, usually a percentage of a
client's assets under management.
Most AMCs are held to a fiduciary standard.
Understanding AMCs
Because they have a larger pool of resources than the individual investor
could access on their own, asset management companies provide
investors with more diversification and investing options. Buying for so
many clients allows AMCs to practice economies of scale, often getting a
price discount on their purchases. Pooling assets and paying out
proportional returns also allow investors to avoid the minimum
investment requirements often required when purchasing securities on
their own, as well as the ability to invest in a larger assortment of
securities with a smaller amount of investment funds.
In some cases, AMCs charge their investors set fees. In other cases, these
companies charge a fee that is calculated as a percentage of the client's
total assets under management (AUM). For example, if an AMC is
overseeing a portfolio worth $4 million, and the AMC charges a 2% fee, it
owns $80,000 of that investment. If the value of the investment increases
to $5 million, the AMC owns $100,000, and if the value falls, so too does
the AMC's stake. Some AMCs combine flat service fees and percentage-
based fees.
Typically, AMCs are considered buy-side firms. This status means they
help their clients buy investments. They decide what to buy based on in-
house research and data analytics, but they also take public
recommendations from sell-side firms.
Pros
Professional, legally liable management
Portfolio diversification
Economies of scale
Cons
Sizeable management fees
But there are also private asset management companies that are not
household names but are quite established in the investment field. One
such example is RMB Capital, an independent investment and advisory
firm with approximately $8.8 billion in assets under management.
Headquartered in Chicago, with 10 other offices around the U.S., and 190
employees, RMB has three divisions: