Private Equity

Private Equity

An investment class where firms raise capital to acquire & manage private companies or take public companies private, with the goal of selling them for a profit.

Limited Partners

The investors. Partners such as public or corporative pension funds, insurance companies, high net worth individual etc. that are investors who commit capital to a private equity fund.

General partners

Fund’s management team members. They are responsible for managing the fund's investments and making key decisions about acquiring and managing portfolio companies.

1-5 yrs

Investment period

5-10 years

Harvesting period

Leveraged buyouts LBO

Combines investment funds with borrowed money. Companies are either purchased or the firm purchases a large stake in the company to control its strategies.

LBO Purpose

To buy companies and make them profitable to sell

Why LBO

Buying companies leverages creditors and investors money to afford larger buyouts.

Venture Capital

Deals with funding early stage startups and new business. Invest in companies they believe have a large potential for growth.

VC funds take minority stake

Difference between LBO and VC

Risk of VC

The companies are new and have no track record

Growth Equity

Companies raise capital to boost expansion. Works similarly to VC but it’s lest speculative. Firms invest in mature companies and ensure that the companies receiving the investment are profitable, and have little debt.

Real Estate Private Equity

Raise capital from outside investors (limited partners). Investment is used to buy, develop, and operate properties. Most funds focus on commercial real estate and generally operate rental residential real estate.

Low Risk REPE

Strategy is conservative and invest in low-risk rental properties offering stable and predictable income.

High Risk REPE

Investments in land or speculative development deals, offering high return potential and risk.

Infrastructure Private Equity

Firms rase capital for PE investors. They use that capital to buy assets, operate them, and sell them for profit. These funds invest in assets that provide utilities or services (oil, gas, electric, bridges, schools, hospitals). These funds are usually stable and operate for decades. Some of these businesses have monopolies making them relatively stable and low risk investments. Think LRR.

Fund of funds

Raises funds from investors but doesn’t invest in private companies/ assets. Acts as an investor and buys into a portfolio of other PE funds. Investors manage the fund and charge a management fee. Beneficial for diversification and provides access to more investments.

Example off an FOF

This fund will invest in a PE funds such as an REPE firm, VC company, or LBO fund.

Mezzanine Capital

In-between debt financing and raising equity capital. Companies usually use it to raise funds for specific projects. This capital is issues to investors in the form of preferred stocks/ subordinates notes.

Aim of Mezzanine Capital

Hybrid form of financing. Earn a higher rate of return than debt and carry a lower rusk than equity financing.

Subordinates Notes

An unsecured debt security earning high interest rates.

Distressed Private Equity

Specialize in lending to companies in financial crises. These funds invest in companies, they take control during bankruptcy/ restructuring and aim to ultimately buy the company at a lower price. Then work to turn these companies around and sell them for a higher price, or make public and sell them on the stock market.

Secondaries

Buy companies or assets and invest in PE funds portfolios. Man purpose is to buy investments committed in a fund.

Secondary Market

Where existing investments in private equity funds are bought and sold. If an investment hasn’t reached the harvesting period but an investor wants to take their money out of the fund they sell it on this market.