what is private equity

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What is Private Equity?

Introduction to the Basics

Understanding Private Equity


• The Basics– Private equity is an asset class

– Private equity is a source of investment capital

– Enables those with high net worth to invest in private companies

• Overall goal– Achieve attractive rate of return for investors

Private Equity (PE) Strategies


• Leveraged buyouts

• Venture capital

• Growth capital

• Mezzanine capital

• Distressed investing

Leveraged Buyout (LBO)


• PE firm buys majority stake in mature business– Uses financial leverage

• Debt is serviced using operating cash flows from purchase

• Popularized by firms in the 1980’s

Venture Capital


• Subcategory of private equity

• High net worth & institutional investors– Inject capital into

start-up & early growth companies

• Investments can be further divided– Early-stage

• Start-up companies

– Later stage• Company already

generating cash flow• May even be

profitable

Growth Capital


• Injection of cash– Relatively mature companies

that are generating revenue

– Funds to expand or restructure operations

• Can also be used to reduce debt on balance sheet

• Often a minority stake vs. controlling share

Mezzanine Capital


• Subordinated debt or preferred equity shares– Represents most junior portion of company’s

capital structure– Senior to company’s common shares

• Often used to reduce equity capital needed to finance a LBO

• Used by smaller companies when unable to access other capital

Distressed Debt


• Special situation‒ Investing in debt of company with serious

financial problems• “Distressed-to-control” strategy

– Acquiring debt in hopes of taking controlafter restructuring

• “Special situations” or“turnaround” strategies– Provide capital to help rescue

restructuring company

How Does PE Work?


Analyze business with focus on EBITDA (earnings before interest, taxes, depreciation & amortization)

Upon agreement to pursue acquisition, propose offer

Conduct thorough due diligence

No major obstacles…transaction proceeds

DEAL FLOW

Passive vs. Active Investors


• Passive– Rely on existing

company management to grow business & improve profitability

• Active– Take over company

management after purchasing controlling shares• Provide expertise,

contact network & operational support

Exit Strategies


1. Sell business at higher price than paid2. Sell or merge the business with a

strategic buyer3. Recapitalization: cash distributed to

PE investors– Via cash flow or by issuing debt securities

4. Initial public offering (IPO) of stock to the public market

Overall goal: achieve attractive return for investors. How to monetize efforts?

Private Equity Firms


• Who are the major players?– 1000’s of firms actively managing PE funds– Ranking typically based on amount of capital

raised• Private Equity International

– Industry publication– Compiles annual ranking of top 300 PE firms

in the world• Based on amount of direct-investment capital

raised over 5-year window

Top 20 PE Firms


Source: PEI Media

Geographic Distribution


N. America53%Europe

27%

Asia/Other20%

% of PE Firmsby Geographic Location

Source: Prequin (www.prequin.com)

PE Jobs


• PE investing has grown in past two decades

• Represents 5 – 15% of many high net worth investor & institution portfolios

• PE professionals bring unparalleled management experience, resulting in:– Greater productivity, efficiency & profitability

Attracting the Best and the Brightest


Thank You

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what is private equity

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