Definition of 'Private Equity'

Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.

Investopedia explains 'Private Equity'

The size of the private equity market has grown steadily since the 1970s. Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO.

What is private equity?

Definition

Save to FavoritesSee Examples

Money invested in firms which have not 'gone public' and therefore are not listed on any stock exchange. Private equity is highly illiquid because sellers of private stocks (called private securities) must first locate willing buyers. Investors in private equity are generally compensated when: (1) the firm goes public, (2) it is sold or merges with another firm, or (3) it is recapitalized .
Read more: http://www.businessdictionary.com/definition/private-equity.html#ixzz2TcSnZeZ9

What is a Private Equity Firm? Private equity investments typically require a lot of financial capital. Groups of investors come often come together to pool investment resources into private equity funds, which are managed by private equity firms. Understanding how private equity firms work will allow you to decide if investing in one might be a good choice for you. Private Equity Defined Private equity firms make their money through the management of private equity investments. This means that they invest in companies or other assets that are not publically traded. These assets or companies fall into three main groups: high-potential start-ups that have a good idea but need money

and time to be successful, more mature companies that need money to expand or make other changes, and low-profit companies that need to be restructured to be more profitable. The role of private equity firms is central to the success of these companies or assets. Private Equity Firms Private equity firms are investment managers that make investments in the private equity of companies. They use a variety of different strategies to invest. These may include leveraged buyouts (LBOs), growth capital, and venture capital. Private equity firms may also be described as financial sponsors of companies in which they have invested. In general, a firm will raise a pool of capital, also called a private equity fund, out of which it will make investments. Investment Strategies There are three main types of investments that private equity firms make. The first is a leveraged buyout, in which the firm acquires enough shares in a publically traded company to control it and take it private. The firm can make changes to the companys business plan and personnel to make it more profitable and then offer its stocks to the public again. The firm may also invest venture capital in a start-up company that has a good idea but needs money and time to make a profit. Finally, investments of growth capital allow more mature companies to expand or change direction. Making Money Private equity firms make money for their investors through several main strategies. The firm may do a recapitalization, which means that cash is distributed to shareholders either from the companys cash flow or by raising debt. Secondly, the company may be sold in return for shares in another company or cash in a merger or acquisition. Finally, the firm may conduct an Initial Public Offering (IPO) of stock to the public. The firm itself receives a percentage of the profit and a periodic fee for managing the private equity fund. The 5 Biggest Private Equity Firms Private Equity International magazines ranks private equity firms according to a proprietary system. This ranking is based on a number of factors, the biggest of which is the amount of money raised for private equity investment over the last five years. According to the 2010 rankings, Goldman Sachs Private Investment Area is the largest private equity firm in the world, having raised $54.5 billion over the past 5 years, followed by The Carlyle Group, at $47.8 billion. Kohlberg Kravis Roberts at $47 billion, TPG at $45.1 billion, and Apollo Global Management at $34.7 billion finish up the top five. Investing with private equity firms can yield a huge return on investment, but generally only the wealthy have enough money to make these kinds of investments. However, a few private equity firms now offer their stock to the public.

http://www.wallstreetoasis.com

Private Equity Overview

Return to Main FAQ Page Private Equity is one of the most vaunted types of work in finance. The typical route into private equity is after having spent 2 years at a top investment bank and / or completing an MBA at a top business school. For an excellent insight into the Private Equity world, read Barbarians at the Gate which details the LBO of R.J.R. Nabisco by KKR in the 1980s.

What Is Private Equity?

Private Equity is not very well known outside of the finance world, but it is one of the key players in global bus iness. Private Equity firms are part of the fabled buy -side and some of the largest firms (megafunds) are: Kohlberg, Kravis & Roberts (KKR) Blackstone Bain Capital Carlyle Group

The definition of private equity is simply money invested into a private company, or the privatization of a company through the investment of outside money. Basically, what private equity firms attempt to do is to invest into a company, take a majority stake, improve the company and then exit their investment at a large profit. In order to magnify returns, PE firms make use of leverage (borrowed money) to conduct Leveraged Buyouts (LBOs). Private Equity firms can either focus on a specific sector (Energy, Technology, Healthcare etc.) or operate across a broad spectrum. The larger the firm, the more likely it is to cover more sectors.

How Do Private Equity Firms Work?

PE firms will typically acquire 100% of the target company and make use of a combination of cash and debt to finance the acquisition. The advantage of using debt is that the firm has to invest less of its own cash, and therefore the return on equity is higher and they can undertake bigger / more investments. When the target company is acquired, the future cash flows are used to pay off the debt used. If the PE firm in question is using leverage, they will require a financial sponsor (typically a bank) to loan them the money.

The aim of the investment by the PE firm is to take a business, increase its value and then sell its share in the business. Typically, PE firms will target 20% return per year. The way the firm will improve the business can be anything from replacing the management, reducing costs, improving efficiency or many other possible actions. Private Equity investments are usually not that risky (at least compared to VC) because the target firm is usually quite large and is unlikely to collapse in value.

What Do You Do In Private Equity

As a junior employee in PE, your work is actually quite similar to that of investment banking, but the hours are (usually) less and the pay is (usually) more. The wor k will involve valuing companies, modeling for mergers / LBOs, conducting DCF analysis etc.

http://forbesindia.com

How Does Private Equity Work in India?

by Yale

Private equity experts and investors in India describe a unique developing market where even with bountiful capital and few opportunities for anything but minority shares the sector is profitable and a key to harnessing the country's tremendous entrepreneurial energy

inShare19

+ Comment now Email Print

A
cross the skyline of India's cities, countless cranes and towers of bamboo scaffolding offer testament to the building of a new economy. "India is in the middle of a high growth phase," says Ashish Dhawan, co-founder of

ChrysCapital which manages $2.5 billion in six funds. "We're starting from a low per capita income and we've yet to reach middle income status. If you look at that macro backdrop8% real growth, 13% or 14% nominal growththe appropriate role for private equity is really to provide growth capital for companies that are serving the consumer." Dhawan and others in the field make a clear distinction between private equity in India and other parts of the world. "Our belief has been that over the last decade, the sweet spot for private equity is really not what it is in the Western world, which is leveraged buyouts, financial re-engineering, taking familyowned businesses and professionalizing them," he says. "Instead it's working with entrepreneurs who have a mid-sized business, putting in capital and helping the business to become three or four times its size over a five-year period of time." ChrysCapital has completed nearly 60 deals since 1999. The legal environment further shapes the industry. "We don't do turnarounds," says Dhawan. "India's bankruptcy laws are fairly out of date. There is no real distressed market here. The banks have healthy capital ratios, so they're not looking to sell off loans. It's hard to come in and get a sweetheart deal on a failing company." Dhanpal Jhaveri, partner and CEO of Everstone Capital Management, a firm with $1.5 billion under management, sees this growth-focused approach continuing. "Demand-supply gaps will continue for at least another 10 years, allowing for this growth model to continue. With 58% of GDP driven by domestic consumption, a rapid growth of the middle class, and urbanization, we think that domestic consumption is likely to be the cornerstone of Indian growth for the next 10 to 20 years." A Flood of Foreign Capital The allure of rapid growth has attracted foreign capital. The money typically comes from institutional investors: endowments, sovereign wealth funds, pension funds, funds of funds, and family offices. A common pattern among firms is to start with U.S.-based sources, then to diversify, with subsequent funds drawing on investors from Europe and Asia. Domestic institutional investors shepherding Indian capital have tight regulations on their ability to make equity investments and limited experience with alternative asset classes like private equity. "We are still ramping up as a country in terms of our understanding of this asset class," says Sanjeev

Aggarwal, co-founder and senior managing director of Helion Venture Partners, a $600 million India-focused venture fund. "It is very high-riskyou can lose all your money. And returns take a long time because companybuilding is a long process. Right now, this asset class is better understood in the Western world, but that will change over time." The overall size of private equity and venture capital is relatively small, but experts see it as an important component of the economy. "I think the industry is extraordinarily significant," says G. Sabarinathan, a professor of finance and entrepreneurship at the Indian Institute of Management, Bangalore. "In order to harness the tremendous entrepreneurial energy of India in the most optimal way, you need enlightened capital that is willing to wait three to five years, back the right team, and give the right postinvestment support." But Sabarinathan sees a major challenge: "There is so much competition for deals," he says. That competition developed because interest in India came as a flood, according to Dhawan. "There has been a rush of capital coming in. Many emerging markets became very attractive in the 2006-2007 period. ChrysCapital had generated particularly good returns in the five years prior to that. A couple of global firms that have been here longer, like Warburg Pincus and Citibank, also generated good returns. That attracted all the global funds to India." He adds, "They came in all at once, and there was this massive crowding effect. The overhang of capital led to regulations going up and a lot of competition." That competition to invest has made it harder to meet targets on returns. "Valuations are going through the roof," Sabarinathan said. "Part of the reason people lose money is that they pay far too much up front." Making Do With a Minority Share With a booming economy in recent years, entrepreneurs have been succeeding and saw little reason to hand over their company for growth capital. "Indian management is very control-sensitive," Sabarinathan says. "They try to defer raising external capital as long as they are able. One way they do that is by using a lot of leverage: the debt market is a lot more forgiving in India, so founders tend to borrow a lot." Ashish Dhawan says that one of the biggest challenges to private equity in India is minority ownership stakes. "You're not in control. You're at the mercy

of the entrepreneur, because the entrepreneur typically owns 51%." He adds, "We only selectively help when there are one or two key hires that need to be made, but we're not really involved with changing the whole management team or bringing in a new CEO. In that sense, we're different from a firm in the Western world where they would also have senior operating partners on the team who would get involved with portfolio companies." Where's the Exit? "There are few instances of VC/PE funded companies that go through a second funding round," Sabarinathan says. "In India it is almost an article of faith that there will be one round of financing and then the company will go public." That may change, at least in the short run. "The IPO market is not looking good at all, currently," Sabarinathan says. "The IPO windows tend to be fickle. They open for a short period of time." However, when those windows do open, even small to mid-sized companies have gone public. The periodic option for going public while relatively small gives private equity additional opportunities. "Private equity here is not just investing in private companies, but also in public companies," says Dhawan. On the other hand, he adds, the public market can act as a competitor to private equity. "If a company is already public, it can easily do a follow-on offering as opposed to looking to the private equity sphere for funds." On top of that, exits are a concern. "Our market is still not very liquid. It's not a very deep market," says Dhawan. "In good times, clearly, you can exit even from the 500 largest listed companies by market cap. In slightly more difficult times the liquidity tends to be concentrated in the top couple hundred companies. Given the private equity invested in mid-sized companies, and you may have a large stake20, 25, 30%it may be difficult to exit some of these companies, particularly with entrepreneurs that are not ready for a strategic sale, which is the case in a vast majority of situations." Sabarinathan registers concern about exits as well. "There has been a recent trend in foreign funds to shut down their Indian outposts and to cut back on the India allocations. I think that is partially driven by the perception that exits are going to get more and more difficult." Competing Globally, Growing Locally Given that India's economic liberalization happened in 1991, the sector, which depends heavily on Western-style business practices and entrepreneurialism,

is maturing quickly, though not without some false starts. "I think investors are now discerning and demanding," Sabarinathan says. "There is an enormous maturing in the businesses they fund. These businesses could be in any part of the world; they are globally competitive. It doesn't matter that they are in India. Whether it's pharmaceuticals, media, technology, or manufacturing, in terms of scale, scope and quality they are globally competitive. That is a very significant difference." More and more private equity firms are Indian owned and managed. Sabarinathan is waiting for data to find out if that will make a difference to returns, but he does believe that "it's important that foreign investors have Indians, raised in India, on their team." He adds, "Although Indian businessmen are trying to learn Western best practices, cultural and social factors contribute to making this a very different market. Law and property rights are very different. Many things you take for granted simply don't work the way they would in the United States or the UK. On very crucial matters, the average Indian tends to be quite clannishor to put it even less charitably, they tend to be rather parochial." Meanwhile, Indians who have had successful entrepreneurial careers overseas are returning to India, further strengthening the industry. "Entrepreneurs who made money in the last couple of decades want to give that money back to help create more entrepreneurship," says Aggarwal. "An angel investor community is emerging."

Read more: http://forbesindia.com/article/yale/how-does-private-equitywork-in-india/34497/1#ixzz2TcZ1aSS4