Private equity

Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor. Each of these categories of investor has its own set of goals, preferences and investment strategies; each however providing working capital to a target company to nurture expansion, new product development, or restructuring of the companys operations, management, or ownership. Private equity is also often grouped into a broader category called private capital, generally used to describe capital supporting any long-term, illiquid investment strategy. Simple example A private equity fund, ABC Capital II, borrows $9bn from a bank (or other lender). To this it adds $2bn of equity money from its own partners and from limited partners (pension funds, rich individuals, etc.). With this $11bn it buys all the shares of an underperforming company, XYZ Industrial (after due diligence, i.e. checking the books). It replaces the senior management in XYZ Industrial, and

they set out to streamline it. The workforce is reduced; some assets are sold off, etc. The objective is to increase the value of the company for a fast sale. The stock market is experiencing a bull market, and XYZ Industrial is sold two years after the buy-out for $13bn, yielding a profit of $2bn. The original loan can now be paid off with interest of say $0.5bn. The remaining profit of $1.5bn is shared among the partners. Taxation of such gains is at capital gains rates. Note that part of that profit results from turning the company around, and part results from the general increase in share prices in a buoyant stock market, the latter often being the greater component. Notes:

The lenders (the people who put up the $11bn in the example) can insure their loans against default, at a cost, by selling credit derivatives, including credit default swaps (CDSs) and collateralized loan obligations (CLOs), to other institutions, such as hedge funds.

Often the loan/equity ($11bn above) is not paid off after sale but left on the books of the company (XYZ Industrial) for it to pay off over time. This can be advantageous since the interest is typically off settable against the profits of the company, thus reducing, or even eliminating, tax.

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. Private equity firm This article is about private equity fund managers or financial sponsors. For private equity investment funds and an overview of the industry, see private equity fund and private equity.

Structure of a generic private equity fund A private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital. Often described as a financial sponsor, each firm will raise funds that will be invested in accordance with one or more specific investment strategies.

Typically, a private equity firm will raise pools of capital, or private equity funds that supply the equity contributions for these transactions. Private equity firms will receive a periodic management fee as well as a share in the profits earned (carried interest) from each private equity fund managed. Private equity firms, with their investors, will acquire a controlling or substantial minority position in a company and then look to maximize the value of that investment. Private equity firms generally receive a return on their investments through one of the following avenues:

an Initial Public Offering (IPO) shares of the company are offered to the public, typically providing a partial immediate realization to the financial sponsor as well as a public market into which it can later sell additional shares; a merger or acquisition the company is sold for either cash or shares in another company; a Recapitalization cash is distributed to the shareholders (in this case the financial sponsor) and its private equity funds either from cash flow generated by the company or through raising debt or other securities to fund the distribution.

Private Equity Firms in India: Singhania & Co.LLP is a private equity firm specializing in financial restructuring, middle market transactions and expansion capital. The firm primarily makes equity investments in manufacturing, information technology, life sciences, medical technology, and services sectors. Within the information technology sector, it focuses on hardware, software services and products in software. In life

sciences and medical technology sector, the firm invests in medical devices, health care services, pharmaceuticals, and financial services. Private Equity Venture Capital India: Private equity is money invested in companies, which are not publicly traded on a stock exchange or invested as part of buyouts of publicly traded companies in order to make them private companies. Capital for private equity is raised mainly from institutional investors. There is a wide array of types of private equity and the term private equity has different connotations in different countries. Venture capital is a type of private equity capital normally provided for early-stage, high-potential, and growth companies in the interest of generating a return through an eventual realization event such as a trade sale of the company. Venture capital investments are commonly made as cash in exchange for shares in the invested company. It is distinctive for venture capital investors to identify and back companies in high technology industries such as biotechnology and ICT. Private Equity: Contents 1 Who Is Impacted by Private Equity? 1.1 Private Equity Goes Public 2 What is private equity? 2.1 What drives private equity? 2.2 Has private equity reached its peak?

Private equity refers to a type of investment aimed at gaining significant, or even complete, control of a company in the hopes of earning a high return. As the name implies, private equity funds invest in assets that either are not owned publicly or that are publicly owned but the private equity buyer plans to take private. Though the money used to fund these investments comes from private markets, private equity firms invest in both privately and publicly held companies. The private equity industry has evolved substantially over the past decade or so. The basic principle has remained constant: a group of investors buy out a company and use that company's earnings to pay themselves back. What has changed are the sheer numbers of recent private equity deals. In the past ten years, the record for the most expensive buyout has been broken and re-broken several times. Private equity firms have been acquiring companies left and right, paying sometimes shockingly high premiums over these companies' market values. As a result, takeover targets are demanding exorbitant prices for their outstanding shares; with the massive buyouts that have made headlines around the world, companies now expect a certain premium over their current value. One example is Free-scale Semiconductor, who turned down a deal that paid a nearly 30% premium over its market value, holding out for a sweeter package, which it received. The sheer numbers of these high-priced deals that have occurred in recent years have led some to question whether this pace is sustainable in the long run. This could turn out to be a self-fulfilling prophecy; as concerns grow and people become less eager to invest in private equity deals, firms won't be able to raise the money to fund their acquisitions, essentially crippling the industry. Who Is Impacted by Private Equity? Commercial banks

Bank of America (BAC), Citigroup (C), and J P Morgan Chase (JPM) are among the largest lenders to private equity firms. These are the main firms who have been stuck with the high-yield bonds that investors are increasingly reluctant to buy. A decline in private equity would lead to big losses for these lenders, since they're already sitting on over $40 billion in unsellable debt.[1] Investment banks Goldman Sachs Group (GS), Merrill Lynch (MER), Morgan Stanley (MS), Lehman Brothers Fin SA (LEH), and other investment banks have been offering billions of dollars in bridge loans, which can be used to cover the costs of a private equity acquisition until permanent funding is found. These loans haven't been used that often in the past, but as private equity firms find it harder to raise capital by other methods, they could start drawing upon these loans, leaving investment banks with billions of dollars of loans. With the current state of the debt market, these banks could have trouble finding secondary buyers, meaning that they'd be stuck with heaps of unwanted loans. Also, investment banks are heavily involved with the underwriting of debt and securities for acquisitions and IPOs. These services bring in hefty fees for I-banks, and any decrease in demand for private equity-related services would negatively impact revenues. Last men standing As the number of private equity deals has increased, the targets of acquisitions have primarily been small- to mid-size companies. While larger companies are technically fair game, some are just much too large to be seriously considered as possible acquisitions. Due to their size, large corporations such as these have benefited from the privatization in their respective industries. As

smaller companies are taken private, investors wanting exposure to the industry are left with fewer options in terms of stocks; the remaining companies are seeing higher demand (and higher prices) for their stocks. Exxon Mobil (XOM), Royal Dutch Shell (RDS), and ChevronTexaco (CVX) are potential beneficiaries of private equity deals involving small- to mid-sized oil refineries. Piedmont Natural Gas Company (PNY), Northeast Utilities (NU), and Sempra Energy (SRE) may benefit from a host of global private equity transactions in natural gas. Private Equity Goes Public Blackstone Group (BX) is one of the first private equity firms that has gone public with a recent initial public offering in June 2007. China took a $3 billion stake before the IPO, which amounts to approximately 10% of the company's value. Blackstone manages about $800 billion in capital, ranking it as one of the top private equity firms by assets. Most market observers remain optimistic that Blackstone will deliver strong value to shareholders over time, given their excellent investment record since the company's inception. KKR--a leading private equity firm originally known as Kohlberg, Kravis, Roberts--announced in early July, 2007, that it was planning to go public. KKR is famous for its involvement in high-profile buyouts, including the $45 billion buyout of TXU in February 2007. According to their filings with the SEC, the company said it would sell up to $1.3 billion in common equity units and use proceeds to expand the business. It was reported later that same month that poor conditions in the debt market could delay KKR's IPO, as the firm is finding it more difficult to arrange financing for its deals.

What is private equity?

Private equity is essentially a way to invest in some asset that isn't publicly traded, or to invest in a publicly traded asset with the intention of taking it private. Unlike stocks, mutual funds, and bonds, private equity funds usually invest in more illiquid assets, i.e. companies. By purchasing companies, the firms gain access to those companies' assets and revenue sources, which can lead to very high returns on investments. Another feature of these private equity transactions is their extensive use of debt in the form of high-yield bonds. By using debt to finance acquisitions, private equity firms can substantially increase their financial returns. The debt used in buyouts has a relatively fixed cost, so if a private equity fund's return on assets (ROA) is greater than this cost, the fund's return on equity (ROE) is higher than if it hadn't borrowed money. The same principle applies in reverse, however, making these leveraged buyouts potentially very risky; if the acquired company's ROA is lower than the cost of the debt used to buy it, then the private equity fund's ROE is less than if hadn't used debt. The firm would lose money on

the investment and still have to pay back the loans, a situation similar to having negative equity in the housing market. While private equity firms sometimes pay themselves back using the acquired company's profits, this isn't their principal moneymaking area. Actually, clauses in private equity deals known as covenants, which assure such repayment, have become increasingly rare in recent years. Rather than making money from guaranteed minimum dividends, etc., private equity firms have been generating most of their profit from the "exit event", or the time when they either sell the company to another private entity or return it to the public markets, presumably for a higher price than they paid originally. Especially with their heavy use of leverage to acquire companies, private equity firms can make a substantial profit in this way. One example is the acquisition of Hertz Global Holdings (HTZ), the car rental company. When Ford Motor Company (F) decided to sell the company in 2005, private equity firms Clayton, Dubilier, and Rice, Inc., Carlyle Group, and Merrill Lynch Global Private Equity stepped in to buy the company. When the deal was completed in December of 2005, the firms had put up $2.3 billion in equity, and the acquired Hertz had taken on $12.5 billion in debt. Just eleven months later, Hertz was returned to the public markets with an IPO; even before the exit, Hertz paid $991 million to the firms in special dividends, $25 million to each for "acquisition services", and $2.25 million in other various fees. After the IPO, the three firms received another round of special dividends valued at around $427 million and $15 million to terminate standing agreements. Now, the three firms hold a combined 91.9 million shares of Hertz, valued at almost $2.1 billion (up 43% since the IPO in November of 2006). Merrill Lynch made out particularly well; in addition to its private equity firm doubling its investment in a year, the firm itself collected advisory fees for both the acquisition and the IPO and now

holds 75 million shares of Hertz in addition to its private equity division's 32 million. What drives private equity? Raising Capital Why would a company agree to sell a part of its interests to a private equity firm? There may be several reasons. First, the company may need a large inflow of capital for long-term productivity investments such as research and development. Rather than waiting several quarters (or years) to gather sufficient capital, the company may choose to sell part of its interests in exchange for the ability to pursue development projects sooner. This may be especially true of highly timesensitive industries such as technology (e.g. software, telecommunications, and Internet services), where a few quarters may make a critical difference in a companys ability to gain (or maintain) a market advantage. Increasing Regulation of Public Markets Second, given the increasing regulation and scrutiny in the public markets over the last several years, some companies may wish to avoid having their destinies controlledor at least heavily influencedby public shareholders. In a public company, shareholders have the right to cast votes with regard to any number of issues critical to the company. In a private equity transaction, such rights typically do not exist. Accordingly, a company can raise capital without relinquishing operating control to external shareholders. Nevertheless, a private equity firm does retain some control, such as the ability to influence the composition of management teams. Often, a private equity firm may take an

interest in a company on the condition that the company install new managementwhich ideally will improve operating results and drive profits. Effect on Public Markets For stock market investors, the real question is how the private equity market has affected public markets and what its likely effects will be in the future. Many analysts argue that the increase in private equity deals has actually benefited some aspects of the stock market; the reason is that, with so many companies going private, its become harder for public investors to gain exposure to industries where private equity has been especially influential. Small- to mid-size firms in the energy and finance industries are prime examples. With the increase in private equity deals, the availability of publicly traded shares of such companies has decreased. This decrease in supply has caused the remaining shares to increase in price; as there are fewer available, each becomes more valuable.

Also, private equity can boost a company's stock price if people think a buyout is likely. Companies that are perceived as likely targets of private equity buyouts have seen their stock prices rise in anticipation of the transaction. Given recent trends in the private equity industry, investors often feel safe in assuming

that private equity firms will pay a hefty premium over a company's market value. This drove up the stock prices for companies such as Martha Stewart Living Omni media (MSO) and RadioShack (RSH), which were commonly mentioned as buyout targets. Financing the Private Equity Boom One beneficiary of private equity's strength is certain: the financial firms who structure the deals. Whether they're lenders or underwriters (such as investment banks), a number of financial firms have used their market savvy and extensive industry contacts to ensure that they're in the middle of what has been one of the most profitable trends over the past market cycle. That said, if long-term interest rates continue to rise over the next one to two years, it could become more difficult for financial firms to find the capital and participants necessary to keep private equity deals moving at the same rapid pace. Has private equity reached its peak? The subprime-inspired housing slump and its subsequent impact on Wall Street investment banks have somewhat diminished investors' appetite for risk. While the potential returns from a private equity firm's leveraged buyout of a company can be great, investors have begun to realize just how risky the highly leveraged transactions can be. This has been making it increasingly difficult for private equity firms and the investment banks that structure their deals to find people willing to invest in their risky, high-yield bonds. A number of recent debt offerings, including the debt used in Cerberus Capital Management's buyout of the Chrysler Group, have been postponed or abandoned due to deteriorating conditions in the U.S. debt market. On July 25,

2007, it was announced that Deutsche Bank AG (DB), J P Morgan Chase (JPM), and six other banks were stuck with around $10 billion of loans that they couldn't sell; the debt was used for private equity firm KKR's acquisition of Alliance Boots Plc.[2] This increasingly common occurrence is hitting banks hard; they can either cut their losses and sell the loans on the cheap or wait until conditions improve, neither of which is particularly appealing. As the debt market contracts, companies that were previously touted as LBO targets, including Martha Stewart Living Omni media (MSO) and RadioShack (RSH), are seeing their stock prices plummet. The same logic that drove their stocks higher and higher also led to their fall; when investors heard the speculation about a slowdown in private equity, they realized that they might not be able to sell their shares at the premium price they'd been hoping for. Shareholders scrambled to sell their stock while the price was still relatively overinflated. Martha Stewart and RadioShack stocks plunged 25% and 30%, respectively, in just three weeks.