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Defined
Private equity is a broad term that refers to any type of equity
investment in an asset in which the equity is not freely tradable on a
public stock market. Categories of private equity investment include
Leveraged buyout, venture capital, growth capital, angel investing,
mezzanine capital and others.
Private Equity refers to securities in companies that are not
listed on a public stock exchange; while technically the opposite of
public equity they are broadly equivalent to stocks, though return on
investment often takes much longer. As they are not listed on an
exchange, any investor wishing to sell securities in private companies
must find a buyer in the absence of a marketplace. In addition, there
are many transfer restrictions on private securities. This long term
investment area currently has over $711 billion in assets.
The sale of private securities is used by young companies to generate
capital. Investors generally receive their return through one of three
ways: an initial public offering, a sale or merger, or a
recapitalization.
Considerations relative to other forms
of investment include:
** Very high entry point
costs, with most private equity funds requiring significant initial
investment (upwards of $100,000) plus further investment for the first
few years of the fund called a 'drawdown'.
** Once invested, it is
very difficult to gain access to your money as it is locked-up in
long-term investments which can last for as long as twelve years.
** If the private equity
firm can't find good investments they often end up returning some of
your money back to you but you can lose all your money if the
private-equity fund invests in failing companies.
** High fees which often
exceed that of hedge funds: as much as 2.5% for management fees and 20%
or more as the performance fee.
For the above mentioned reasons, private equity 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.
Contents
* 1 Private equity firms
* 2 Size of industry
* 3 See also
Private Equity Firms
Generally, private equity funds are organized as limited partnerships
which are controlled by the private equity firm that acts as the general
partner. The fund obtains commitments from certain qualified investors
such as pension funds, financial institutions and wealthy individuals to
invest a specified amount. These investors become passive limited
partners in the fund partnership and at such time as the general partner
identifies an appropriate investment opportunity, it is entitled to
"call" the required equity capital at which time each limited partner
funds a pro rata portion of its commitment. All investment decisions are
made by the General Partner which also manages the fund's investments
(commonly referred to as the "portfolio"). Over the life of a fund which
often extends up to ten years, the fund will typically make between 15
and 25 separate investments with usually no single investment exceeding
10% of the total commitments.
General partners are typically compensated with a management fee,
defined as a percentage of the fund's total equity capital, as well as a
carried interest, defined as a percentage of profits generated by the
fund (so long as some minimum return for the investors called the hurdle
rate is achieved). Typically, general partners of funds will receive a
management fee of 2% and carried interest of 20%. (Although typically,
the carry is reduced by the amount of the management fees received).
Gross private equity returns may be in excess of 20% per year, which in
the case of leveraged buyout firms is primarily due to leverage, and
otherwise due to the high level of risk associated with early stage
investments. Although there is a limited market for limited partnership
interests, such interests are not freely tradable like mutual fund
interests.
Size of Industry
Nearly $180bn of private equity was invested globally in 2004, up over a
half on the previous year as market confidence and trading conditions
improved. Funds raised globally increased 40% in 2004 to $112bn. Prior
to this, investments and funds raised increased markedly during the
1990s to reach record levels in 2000. The subsequent falls in 2001 and
2002 were due to the slowdown in the global economy and declines in
equity markets, particularly in the technology sector. The decline in
fund raising between 2000 and 2003 was also due to a large overhang
created by the end of 2000 between funds raised and funds invested.
The regional breakdown of private equity activity shows that in 2004,
66% of global private equity investments (up from 58% in 1998) and 62%
of funds raised (down from 72%) were managed in North America. Between
1998 and 2004, Europe increased its share of investments (from 24% to
26%) and funds raised (from 18% to 31%). Asia-Pacific region’s share of
investments and of funds raised during this period was virtually
unchanged at around 6% while share of the rest of the world fell. The
country breakdown for private equity activity shows that private equity
firms in the US managed 64% of global investments and 59% of funds
raised in 2004. The UK was the second largest private equity centre with
13% of investments and 11% of funds raised.
Prominent private equity firms include: Kohlberg Kravis & Roberts,
Blackstone, Texas Pacific Group, Harvest Partners, The Carlyle Group and
Warburg Pincus
[edit]
See also:
* Business
* Leveraged buyout
* Mergers & acquisitions
* Venture capital
From Wikipedia, the free encyclopedia
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