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In finance, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. There are two basic financial market participant categories Investor vs See Investor AB for the Swedish investment company An investor is any party that makes an Investment. A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies Speculation, in a financial context is making an investment that increases the overall risk in a portfolio Institutional investors are organizations which pool large sums of money and invest those sums in companies A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money A building society is a financial institution owned by its members, that offers banking and other Financial services, especially mortgage lending A trust company is a Corporation, especially a Commercial bank, organized to perform the Fiduciary functions of trusts and agencies A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than those feasible for most individual investors A credit union is a Cooperative Financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift providing credit Insurance, in Law and Economics, is a form of Risk management primarily used to hedge against the Risk of a contingent loss Investment banks profit from companies and governments by raising money through issuing and selling Securities in the Capital markets (both equity and A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a Pension plan for the exclusive purpose of financing pension Prime brokerage is the generic name for a bundled package of services offered by Investment banks and securities firms to Hedge funds and other professional investors A trust company is a Corporation, especially a Commercial bank, organized to perform the Fiduciary functions of trusts and agencies The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds There are two basic financial market participant categories Investor vs Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions Personal finance is the application of the principles of Finance to the monetary decisions of an individual or family unit Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Financial regulations are a form of Regulation or supervision which subjects Financial institutions to certain requirements restrictions and guidelines aiming to The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated Asset allocation is a term used to refer to how an investor distributes his or her investments among various classes of investment vehicles (e A public company usually refers to a company that is permitted to offer its registered securities ( Stock, bonds, etc A stock exchange, share market or bourse is a Corporation or Mutual organization which provides "trading" facilities for Stock

There are a wide array of types and styles of private equity and the term private equity has different connotations in different countries. [1]

Contents

Types of Private Equity

Private equity investments can be divided into the following categories:

Other Strategies

Other strategies that can be considered private equity or a close adjacent market include:

History and evolution

Main article: History of private equity and venture capital

The seeds of the private equity industry were planted in 1946 when the American Research and Development Corporation (ARD) decided to encourage private sector institutions to help provide funding for soldiers who were returning from World War II. The history of private equity and venture capital and the development of these Asset classes has occurred through a series of boom and bust cycles since the middle of the 20th While the ARD had difficulty stimulating any private interest in the enterprise and ended up disbanding, they are significant because this marked the first recognized time in financial history that an enterprise of this type had been formed. In addition, they had an operating philosophy that was to become significant in the development of both private equity and venture capital: they believed that by providing management with skills and funding, they could encourage companies to succeed and in doing so, make a profit themselves. Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies During the course of their unsuccessful journey, ARD did succeed in raising approximately $7. 4 million, and they did have one rousing success; they funded Digital Equipment Corporation (DEC). By the 1970s such private participation had permeated into the private enterprise formation, but until the late 1970s, the task was being largely carried out by investment arms of a few wealthy families, such as the Rockefellers and Whitneys. [8] In the 1980’s, FedEx and Apple Inc. were able to grow because of private equity or venture funding, as were Cisco, Genentech, Microsoft, Avis, Beatrice Foods, and Dr Pepper. FedEx Corporation ( is a Logistics services company based in the United States. Apple Inc, ( formerly Apple Computer Inc, is an American Multinational corporation with a focus on designing and manufacturing Consumer electronics Genentech Inc ( a composite of Genetic Engineering Technology Inc Microsoft Corporation is an American multinational Computer technology Corporation, which rose to dominate the Home computer The Beatrice Foods Company was a major American food processing company and household name Dr Pepper is a soft drink marketed in North America, South America and Europe by Dr Pepper Snapple Group. [9]. Despite these successes, through a series of "debt-financed leveraged buy-outs (LBOs)" of established firms, the PE firms were being seen with acrimony and being casted as irresponsible corporate raiders- as a threat to the free capitalist structure. A leveraged buyout (or LBO, or highly-leveraged transaction (HLT or "bootstrap" transaction occurs when a Financial sponsor acquires a controlling interest The extreme example of this phenomenon is described in the bestselling book,[10] where the two PE firms Forstmann Little and Kohlberg Kravis Roberts, were described as "Barbarians at the Gate" for their aggressive $25 billion pursuit for RJR Nabisco. Forstmann Little & Company is a Private equity firm specializing in Leveraged buyouts (LBOs Kohlberg Kravis Roberts & Co (commonly referred to as KKR) is a New York City -based Private equity firm that focuses primarily on late-stage Leveraged RJR Nabisco Inc, was an American conglomerate formed in 1985 by the merger of Nabisco Brands and R

Investments in Private Equity

Institutional 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. Institutional investors are organizations which pool large sums of money and invest those sums in companies A stock market, or (equity market is a private or public market for the trading of company Stock and derivatives of company g. , public equity and bonds). Software for Fixed assets management and Stock control developed in 2004. BOND (Building Object Network Databases started development in late 2000 as a Rapid application development tool for the GNOME Desktop by Treshna Most institutional investors, do not invest directly in privately held companies, lacking the expertise and resources necessary to structure and monitor the investment. Institutional investors are organizations which pool large sums of money and invest those sums in companies The term privately held company refers to ownership of a business company in two different ways first referring to ownership by non-governmental organizations and second Instead, institutional investors will invest indirectly through a private equity fund. Institutional investors are organizations which pool large sums of money and invest those sums in companies Private equity fund is a Pooled investment vehicle used for making investments in various equity (and to a lesser extent debt securities according to one of the investment Certain institutional investors have the scale necessary to develop a diversified portfolio of private equity funds themselves, while others will invest through fund of funds to allow a more diversified portfolio than an investor could construct. Institutional investors are organizations which pool large sums of money and invest those sums in companies Private equity fund is a Pooled investment vehicle used for making investments in various equity (and to a lesser extent debt securities according to one of the investment A "fund of funds" ( FoF) is an investment fund that uses an investment strategy of holding a portfolio of other investment funds rather than investing directly

Private equity firms generally receive a return on their investments through one of the following avenues:

Investment features and considerations

Considerations for investing in private equity funds relative to other forms of investment include:

For the above mentioned reasons, private equity fund investment is for those who can afford to have their capital locked in for long periods of time and who are able to risk losing significant amounts of money. This is balanced by the potential benefits of annual returns which range up to 30% for successful funds.

Liquidity in the private equity market

The private equity secondary market (also often called private equity secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. In finance the private equity secondary market (also often called private equity secondaries or secondaries) refers to the buying and selling of pre-existing investor Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market; however, there is a robust and maturing secondary market available for sellers of private equity assets.

Increasingly, secondaries are considered a distinct asset class with a cash flow profile that is not correlated with other private equity investments. In finance the private equity secondary market (also often called private equity secondaries or secondaries) refers to the buying and selling of pre-existing investor As a result, investors are allocating capital to secondary investments to diversify their private equity programs. Driven by strong demand for private equity exposure, a significant amount of capital has been committed to secondary investments from investors looking to increase and diversify their private equity exposure. In finance the private equity secondary market (also often called private equity secondaries or secondaries) refers to the buying and selling of pre-existing investor


Private equity fundraising

Private equity fundraising refers to the action of private equity firms seeking capital from investors for their funds. Typically an investor will invest in a specific fund managed by a firm, becoming a limited partner in the fund, rather than an investor in the firm itself. As a result, an investor will only benefit from investments made by a firm where the investment is made from the specific fund that they have invested in.

As fundraising has grown over the past few years, so too 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 Private Equity Intelligence Ltd.

It is also worth noting that the managers of private equity funds themselves will also invest in their own vehicles, typically providing between 1–5% of the overall capital.

Often private equity fund managers will employ the services of external fundraising teams known as placement agents in order to raise capital for their vehicles. The use of placement agents has grown over the past few years, with 40% of funds closed in 2006 employing their services according to Private Equity Intelligence Ltd. Placement agents will approach potential investors on behalf of the fund manager, and will typically take a fee of around 1% of the commitments that they are able to garner.

The amount of time that a private equity firm spends raising capital varies depending on the level of interest amongst investors for the fund, which is defined by current market conditions and also the track record of previous funds raised by the firm in question. Firms can spend as little as one or two months raising capital where they are able to reach the target that they set for their funds relatively easily, often through gaining commitments from existing investors in their previous funds, or where strong past performance leads to strong levels of investor interest. Other managers may find fundraising taking considerably longer, with managers of less popular fund types (such as European venture fund managers in the current climate) finding the fundraising process more tough. It is not unheard of for funds to spend as long as two years on the road seeking capital, although the majority of fund managers will complete fundraising within nine months to fifteen months.

Once a fund has reached its fundraising target, it will have a final close. After this point it is not normally possible for a new investor to invest in the fund, unless they were to purchase an interest in the fund on the secondary market.

Size of industry

A record $365bn of private equity was invested globally in 2006 up nearly three times on the previous year. Private equity fund raising also surpassed prior years in 2006 and totalled $335bn, up a quarter on 2005. Improved market confidence and trading conditions and strong performance along with stable long-term returns have contributed to this growth. Buyouts have accounted for a growing portion of private equity investments by value in recent years, and increased their share of investments from a fifth to more than four-fifths between 2000 and 2006. By contrast, the share of early stage or venture capital investment has declined during this period.

The regional breakdown of private equity activity shows that in 2006, North America accounted for around 60% of global private equity investments (down from 67% in 2000) and 47% of funds raised (down from 69%). Between 2000 and 2006, Europe increased its share of investments (from 21% to 24%) and funds raised (from 21% to 44%). This was largely a result of strong buyout market activity in Europe. In recent years, there has been a rise in the importance of Asia-Pacific and emerging markets as investment destinations, particularly China, Singapore, South Korea and India. Asia-Pacific’s share of investments increased from 6% to 14% during this period while its share of funds raised remained unchanged at around 8%. [11]

The biggest fund type in terms of commitments garnered was buyout, with 188 funds raising an aggregate $212 billion. So-called mega buyout funds contributed a significant proportion of this amount, with the ten largest funds of 2006 raising $101 billion alone—23% of the global total for 2006. Other strong performers included real estate funds, which grew 30% from already strong 2005 levels, raising an aggregate $63 billion globally. The only fund type to not perform so well was venture, which saw a drop of 10% from 2005 levels.

In terms of the regional split of fundraising, the majority of funds raised in 2006 were focusing on the American market, with 62% of capital raised in 2006 focusing on the US. European focused funds account for 26% of the global total, whilst funds focusing on Asia and the Rest of World account for the remaining 11%.

Venture capital is considered a subset of private equity focused on investments in new and maturing companies. Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies

Mezzanine capital is similar class of alternative investment focused on structured debt securities in private companies. Mezzanine capital, in Finance, refers to a Subordinated debt or Preferred equity instrument that represents a claim on a company's assets which is senior

Private equity firms

According to an updated 2008 ranking created by industry magazine Private Equity International[12] (published by PEI Media called the PEI 50), the largest private equity firm in the world today is The Carlyle Group, based on the amount of private equity direct-investment capital raised over a five-year window. PEI Media is one of the leading financial media groups dedicated to alternative assets globally As ranked in this article, the largest 10 private equity firms in the world are:

  1. The Carlyle Group
  2. Goldman Sachs Principal Investment Area
  3. TPG
  4. Kohlberg Kravis Roberts
  5. CVC Capital Partners
  6. Apollo Management
  7. Bain Capital
  8. Permira
  9. Apax Partners
  10. The Blackstone Group

The full list is located here. The Carlyle Group is a global Private equity investment firm based in Washington D The Goldman Sachs Group Inc, or simply Goldman Sachs ( is a large global Bank holding company that engages in Investment banking securities TPG Capital (formerly Texas Pacific Group commonly referred to as "TPG" is a Private equity investment firm founded by David Bonderman, James Kohlberg Kravis Roberts & Co (commonly referred to as KKR) is a New York City -based Private equity firm that focuses primarily on late-stage Leveraged CVC Capital Partners is one of the top 5 largest private equity firms in the world with approximately US$46 billion in funds focused on management buyouts Bain Capital LLC is a Boston -based Private equity firm founded in 1984 by partners from the consulting firm Bain & Company. Permira is an international Private equity firm based in the United Kingdom, headed by Damon Buffini. Among the most prestigious private equity and investment management firms in the world The Blackstone Group' ( is a company that provides Private equity, financial advisory The following is a ranking of the largest Private equity firms The ranking was compiled by Private Equity International, which reveals that the world's 50 largest private equity

Because private equity firms are continuously in the process of raising, investing and distributing their private equity funds, capital raised can often be the easiest to measure. The following is a ranking of the largest Private equity firms The ranking was compiled by Private Equity International, which reveals that the world's 50 largest private equity Private equity fund is a Pooled investment vehicle used for making investments in various equity (and to a lesser extent debt securities according to one of the investment Other metrics can include the total value of companies purchased by a firm or an estimate of the size of a firm's active portfolio plus capital available for new investments. As with any list that focuses on size, the list does not provide any indication as to relative investment performance of these funds or managers.

Private equity fund performance

In the past the performance of private equity funds has been relatively difficult to track, as private equity firms are under no obligation to publicly reveal the returns that they have achieved from their investments. In the majority of cases the only groups with knowledge of fund performance were investors in the funds, academic institutes (as CEPRES Center of Private Equity Research) and the firms themselves, making comparisons between various different firms, and the establishment of market benchmarks to be a difficult challenge.

The application of the Freedom of Information Act (FOIA) in the certain states in the United States, the United Kingdom and other countries, has made certain performance data more readily available. Specifically, FOIA has required certain public agencies to disclose private equity performance data directly on the their websites[13].

The performance of the private equity industry over the past few years differs between funds of different types. Buyout and real estate funds have both performed strongly in the past few years (i. e. , from 2003-2007) in comparison with other asset classes such as public equities. Year 2003 ( MMIII) was a Common year starting on Wednesday of the Gregorian calendar. Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. In contrast other fund investment types, venture capital most notably, have not shown similarly robust performance. Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies

Within each investment type, manager selection (i. e. , identifying private equity firms capable of generating above average performance) is a key determinant of an individual investor's performance. A private equity firm is an investment manager that makes investments in the private equity i Historically, performance of the top and bottom quartile managers has varied dramatically and institutional investors conduct extensive due diligence in order to assess prospective performance of a new private equity fund. A private equity firm is an investment manager that makes investments in the private equity i Institutional investors are organizations which pool large sums of money and invest those sums in companies Private equity fund is a Pooled investment vehicle used for making investments in various equity (and to a lesser extent debt securities according to one of the investment

It is challenging to compare private equity performance to public equity performance, in particular because private equity fund investments are drawn and returned over time as investments are made and subsequently realized. Private equity fund is a Pooled investment vehicle used for making investments in various equity (and to a lesser extent debt securities according to one of the investment One method, first published in 1994, is the Long and Nickels Index Comparison Method (ICM). Year 1994 ( MCMXCIV) was a Common year starting on Saturday (link will display full 1994 Gregorian calendar) Another method which is gaining ground in academia is the public market equivalent or profitability index. The profitability index determines the investment in public market investments required to earn a target profit from a portfolio of private equity fund investments. A stock market, or (equity market is a private or public market for the trading of company Stock and derivatives of company Private equity fund is a Pooled investment vehicle used for making investments in various equity (and to a lesser extent debt securities according to one of the investment [14]

Further reading

See also

References

  1. ^ This article uses the American definitions for most terms. The history of private equity and venture capital and the development of these Asset classes has occurred through a series of boom and bust cycles since the middle of the 20th The following is a ranking of the largest Private equity firms The ranking was compiled by Private Equity International, which reveals that the world's 50 largest private equity A leveraged buyout (or LBO, or highly-leveraged transaction (HLT or "bootstrap" transaction occurs when a Financial sponsor acquires a controlling interest A management buyout ( MBO) is a form of Acquisition where a company's existing Managers acquire a large part or all of the company. A financial sponsor is a term commonly used to refer to private equity investment firms particularly those Private equity firms that engage in Leveraged buyout or Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies Mezzanine capital, in Finance, refers to a Subordinated debt or Preferred equity instrument that represents a claim on a company's assets which is senior In finance the private equity secondary market (also often called private equity secondaries or secondaries) refers to the buying and selling of pre-existing investor A private investment in public equity often called a PIPE deal involves the selling of publicly traded common shares or some form of Preferred stock Private equity funds and hedge funds are private investment vehicles used to pool investment capital usually for a small group of large institutional or wealthy individual investors Investment banks profit from companies and governments by raising money through issuing and selling Securities in the Capital markets (both equity and Global asset allocation or Global assets under management consists of Pension funds, Insurance companies and Mutual funds. The British Venture Capital Association provides An Introduction to Private Equity, including differences in terminology.
  2. ^ In the United Kingdom, Venture Capital is often used instead of private equity to describe the overal asset class and investment strategy described here as private equity. Venture capital (also known as VC or Venture) is a type of Private equity capital typically provided to immature high-potential growth companies
  3. ^ A Secondary Market for Private Equity is Born, The Industry Standard, 28 August 2001
  4. ^ Investors Scramble for Infrastructure (Fiancial News, 2008)
  5. ^ Is It Time to Add a Parking Lot to Your Portfolio? (New York Times, 2006
  6. ^ [Buyout firms put energy infrastructure in pipeline] (MSN Money, 2008)
  7. ^ Merchant Banking: Past and Present
  8. ^ The New Kings of Capitalism, Survey on the Private Equity industry
  9. ^ Private Equity: Past, Present, Future, by Sethi, Arjun May 2007, accessed October 20, 2007. Arjun Charan Sethi (born 18 September, 1941) is a member of the 14th Lok Sabha of India.
  10. ^ Barbarians at the Gate: The Fall of RJR Nabisco.
  11. ^ Private Equity 2007.pdf
  12. ^ Top 50 PE funds from Private equity international
  13. ^ In the United States, FOIA is individually legislated at the state level, and so disclosed private equity performance data will vary widely. PEI Media is one of the leading financial media groups dedicated to alternative assets globally Notable examples of agencies that are mandated to disclose private equity information include CalPERS, CalSTRS and Pennsylvania State Employees Retirement System and the Ohio Bureau of Workers' Compensation
  14. ^ See Phalippou and Gottschalg's 2007 paper, Performance of Private Equity Fundsfor an overview of the profitability index


The California Public Employees' Retirement System (CalPERS provides Pension fund, healthcare and other retirement services for approximately 1 The California State Teachers' Retirement System, known as CalSTRS administers retirement disability and survivor benefits for California's 813000 public school educators and their families The Ohio Bureau of Workers' Compensation ( OBWC' or BWC) provides workers' compensation insurance coverage for employers and employees in the State of Ohio
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