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 number 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.

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 Omnimedia (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 longterm 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 Omnimedia (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.

Private Equity Firms

Are lack of in-house resources or tight deadlines limiting the research you can do on your target? Would you like your assumptions or data to be validated by an independent third party? Is the lack of on-the-ground presence impeding your India focused investments?

ValueNotes is well positioned to leverage its wide ranging research capabilities and multi-sector domain knowledge to support informed investment decision making. We have provided bespoke research support and advisory services to several PE firms and boutique merchant banks. We have assisted these firms in target selection, M&A due diligence, partner selection, preparing investment pitches and validating investment rationale. Examples of some of our recent projects include: Pre-due diligence on a leading IT consulting firm for a global PE fund: The investment committee of a global PE fund wanted to evaluate the attractiveness and valuation of an IT consulting firm. We analysed the financials of the firm to evaluate whether it would reach a valuation of $1bn (2.5x its current valuation), over a 3-year horizon. We presented an investment summary highlighting the competitive positioning of the target firm, along with a base bestworst case scenario analysis. Due diligence on an auto ancillary company: The client, a boutique investment bank, wanted due diligence on the financial and operational health of a potential acquisition target an auto parts company. ValueNotes was asked to dig deeper to assess the market standing, debt repayment history and financial status of the company. We discovered that the target company had defaulted on debt, and was highly leveraged. Investment opportunities in the KPO sector: A private equity investor wanted to identify the investment opportunities in select KPO segments in India, including animation & media, elearning, engineering design, LPO, pre-media & publishing, and research & analytics. We evaluated a comprehensive universe of relevant companies, and short-listed a few based on their revenues, service focus, client mix, management profiles, and future strategy. Market opportunity assessment of the Indian poultry market: An international private equity firm wanted to assess the Indian poultry market on behalf of a large corporate that was looking to enter the Indian market. The study evaluated the current market for poultry products in India, the industry structure, segmentation, consumer behaviour, retail value chain, supply chain / distribution network, cost structures, marketing margins, regulations, and price trends.

Borrowing patterns of lower & middle income groups in India: An international private equity firm wanted to understand the borrowing patterns of lower and middle income groups in India. Given the lack of published data, in-depth interviews were conducted with lenders (banks, pawn brokers, money lenders, etc) and borrowers (based on their income, occupation and location). The report provided the total market & growth projections, types of lenders & products, loan yields of unorganised lenders, and market dynamics. Current & future offshoring trends in the publishing industry: A private equity fund wanted to evaluate the investment opportunities in the Indian publishing outsourcing sector, with a particular focus on the STM (Scientific, Technical, & Medical) and educational publishing segments. We assessed the viability of offshoring in publishing through an analysis of publishers cost structures, supply chain, and a comparison of price competitiveness of onshore and offshore vendors across service areas. We also provided insights into the current and future offshoring trends in the industry Opportunity assessment & investment appraisal of private hospitals in India: A VC fund management company wanted to evaluate the investment opportunity in the Indian hospital sector India and determine the financial health of large Indian private sector hospitals. The study involved understanding the cost and revenue structures of the hospitals, including revenue and cost per bed, EBITDA levels, salary expenses, royalty payments, interest expense, and the return on capital employe

Top 10 Private Equity Firms in India

Private equity funds--investment funding made without stock being issued--have raised over $17 billion since the year 2000, according to the research agency Preqin. The private equity sector in India declined about 60 percent in 2009 due to recession in overseas markets, but as of 2010, the Indian markets have stabilized despite volatility and uncertainty in global finances. When determining the top 10 private equity firms in India, one measure of success is the amount of funds raised.

1. ICICI Venture
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ICICI Venture Fund management, headquartered in Mumbai, has raised funds to the tune of $3 billion over the last decade. As one of the largest funds, it's a subsidiary of ICICI bank, the largest private sector bank in India.

ChrysCapital
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This New Delhi-based fund launched in 1999 and has raised $1.9 billion in private equity funds. It has made more than 45 investments since its inception, according its website.

Sequoia Capital
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Sequoia Capital India, formerly known as WestBridge Capital Partners, mainly invests in consumer, energy and financial services in India. Headquartered in Bangalore, it focuses on investment in the seed, early and growth stages of industry.

India Value Fund

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India Value Fund, a Mumbai-based fund, was established in 1999 and boasts more than $1.4 billion distributed across four funds. It was formerly known as GW Capital.

Kotak Private Equity Group

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This firm stands as one of the early investors in Indian private equity, launched in 1997. Kotak's pumped $1.4 billion into the Indian market mainly in the infrastructure and health care sectors.

Baring Private Equity Partners

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Established in 1998, Gurgaon-based BPEP has over $3 billion invested mainly in the American, Latin and Indian markets. It generally invests in manufacturing, pharmaceutical and information technology.

Ascent Capital
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Ascent Capital, as one of Indias largest private equity funds, has invested $600 million across three funds, helping more than 40 entrepreneurs access its funds.

CX Partners
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CX Partners--promoted by former Citigroup Venture Capital Investment--made "a final close of its debut fund in excess of $500 million," according to a July 7, 2010, report from Reuters.

Everstone Capital
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Everstone Capital, the equity subsidiary of Future Holdings, raised its first fund in 2006, for $425 million, and set its sights on a $550-million fund in 2010, reports AltAssets.com. Everstone's invested in engineering firms, a renowned childrens clothing producer and other industries.

Blackstone Group
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Blackstone, a U.S.-based firm, remains an emerging player, announcing plans to invest as much as $1.5 billion in Indian infrastructure. In April 2010, it invested $50 million in a regional Indian newspaper, "Jagran Prakashan."

What Are Private Equity Firms?

Private equity firms invest private money in businesses they consider attractive. Private equity firms are usually structured as partnerships, with general partners (GP) presiding over limited partners. The partners tend to be high net-worth individuals, public and private pension funds, endowments, foundations and sovereign wealth funds. According to PEI Media's 2008 ranking of the top 50 private equity firms worldwide, the top four were United States-based. These were The Carlyle Group, Goldman Sachs Principal Investment Area, TPG Capital, and Kohlberg Kravis Roberts.

1. History
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From obscure beginnings as boutique investment houses, through the junk bond leveraged buyout debacle of the 1980s, to the thousands in existence today, private equity firms have become an important source of capital. According to the trade industry association, Private Equity Growth Capital Council (PEGCC), in 2009, private equity firms raised close to $250 billion and made more than 900 transactions with a total value over $76 billion.

Facts
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Private equity firms typically manage funds on behalf of their investors. They look for businesses with higher-than-average growth potential over the long term. They often provide senior management direction to the companies in which they invest. This is especially true in cases of majority control, because bigger returns mean bigger carried interest payouts for the GPs. Carried interest is the portion of the funds that remains with the firm after paying the limited partners and other investors their paid-in capital plus a minimum rate of return, known as the hurdle rate, and transaction expenses.

Strategies
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In 2009, private equity firms invested mainly in five sectors: business services, consumer products, healthcare, industrial products and services, and information technology.

The most common types of investment structures are leveraged buyouts, or LBOs; venture capital; growth capital and turnaround capital. LBOs use both equity and borrowed capital to invest in companies, hence the term "leveraged." Venture capital funds focus on new companies, mainly in the technology, biotechnology and green energy sectors. Growth capital invests in mature companies deemed to be undervalued. Turnaround capital, also known as distressed capital or vulture funds, looks for financially-troubled companies to buy inexpensively; potentially restructured, often through layoffs and asset sales; and then sold for a healthy profit.

Performance
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It is difficult, from the outside, to judge the performance of a private equity firm. Unlike public companies that trade on the stock exchanges, subject to regulatory disclosure requirements, private equity firms do not typically disclose their financial statements. Private equity firms that trade publicly, like Kohlberg Kravis Roberts, do provide information on realized and unrealized profits from their investments. The realized profits are significant. According to PEGCC, through 2009, private equity firms have returned close to $400 billion in cumulative net profits to their investors.

Trends
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With consolidation, private equity firms are getting bigger, investing larger amounts all over the world, and employing multiple investment strategies. After the financial crisis of 2008, the lavish payouts and secretive nature of these firms were under the media and regulatory spotlight. Disclosure requirements and other regulations are under consideration in the U.S. and Europe, with some already in place.

How to Start a Private Equity Company

When considering whether you'd like to start your own private equity company, keep in mind that you'll need to provide most of the startup capital; only a small amount should come from outside lenders. Private equity companies have steadily grown in popularity since the 1970s. You'll also need to be familiar with management buy-ins and buyouts. Your private equity company will be competing with other financial institutions that provide assistance, such as banks. Private equity companies make investments in private companies or they buy out public companies.

Instructions
1. Write up a business plan, which will help guide you through the setup process of your company and will allow you to keep your goals in focus. You'll also need to show potential lenders your business plan, so make sure to be thorough. In your financial information, include an executive summary, company details, your mission and vision, services, management details and financial forecast. Include cash flow and sales information, plus projected loss or profits. 2 Seek out investors who are willing to invest their money for a long period of time. Some may be willing to invest large sums of money.
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3 Find a location for the company. Leasing a building instead of purchasing one can be more cost-effective.
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4 Apply for a business license. There are different business licenses for different types of companies. Contact your local business department for specific details on the paperwork that you'll need to fill out for the private equity company.

5 Market the business, particularly by using the Internet. Create a website for the business. If you're not familiar with computer technology, you can hire somebody to build the website for you. Have business cards printed and hand them out to friends and family, asking them to pass them along to the people they converse with day to day. You also can distribute your business cards to local vendors.

Tips & Warnings

You'll want to set up a procedure for screening clients, since not every client who comes in search of your services will be good for business. You'll want clients who will be able to repay the money that they owe. Screen them first to minimize your own losses. Private equity companies often perform leverage buyouts, or LBOs. In a leveraged buyout, a large amount of debt buys a large purchase, such as a flailing company. The private equity company tries to improve the finances of the company and resells it to another firm.

The Structure of Private Equity Firms

Private equity firms are investment management companies of private equity funds. As fund managers, private equity firms promote or sponsor private equity funds by raising capital from private investors. Private equity funds are normally structured as limited partnerships with the private equity firm as the general partner and contributing investors as limited partners. Private

equity firms themselves do not contribute any capital to the funds and only serve as fund managers.

1. Separate Entities
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Private equity investing involves two separate entities: the private equity firm and the private equity funds that they create. When it comes to financial reporting, there are two sets of financial statements in that the assets under management by a private equity firm are not shown on its balance sheet, but rather reported by the fund. A private equity firm can be organized as either a private company or a publicly traded company such as Blackstone. A private equity firm may form one or more private equity funds with different fund investors.

General Partner
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Private equity firms as professional investment managers are tasked with the organization and formation of private equity funds and fund raising from private investors. As general partner of a private equity fund of limited partnership, a private equity firm is responsible for the management of the investment business of the partnership and assumes the partnership liabilities. The general partner's fund investment responsibilities include searching for investment deals and making investments, on-going portfolio company management and formulating exiting strategies.

Limited Partners
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As limited partners, investors of a private equity fund cannot take part in the partnership operations, and that is one reason why they are not responsible for the full obligations of the partnership business dealings; their liabilities are limited to the amount of capital they contribute. At the inception of a fund, investors make only unfunded commitments to the partnership with the capital drawn down over the initial three to five year period. A private equity fund is normally structured for a finite life of 10 years, at the end of which, all investments would be arranged for exit.

Fees and Profit Distributions

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Private equity firms as managers of private equity funds earn management fees of 1 to 2 percent per year throughout the life of a fund. The fee is based on the amount of capital committed by investors in the deal-sourcing period, and later on the amount of capital actually invested. Fund investors expect to earn an annual rate of return, often referred to as preferred return, on their investments as specified in the partnership agreement. After portfolio investments are sold, contributed capital is first distributed back to investors, in addition to their

preferred return, which is a hurdle rate for the fund investment. Next the fund will allocate any profits its investments have generated between the general partner and limited partners with 20-to-80 split. The 20 percent profit sharing is called the general partner's carried interest.

Other Structural Elements

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Other structural elements include targeted investments and investment restrictions, the number of funds a private equity firm may sponsor and under what terms, and the conditions under which limited partners may replace the general partner. Such provisions are provided in the limited partnership agreement. These contractual obligations are to protect the interest of the limited partnership investors. For example, as required by the so-called successor fund provision, a private equity firm as the fund promoter may not launch and manage another private equity fund until the first fund has seen substantial investments.

What Are Private Equity Special Opportunity Funds?

Private equity is an alternative way to invest in a company compared to traditional investments of stocks and bonds. Investors contribute money to private equity funds that private equity firms have first sponsored and created. Typical private equity investments include taking controlling equity positions in private companies and helping manage them into profitability. Many private equity firms also engage in special investment opportunities that require the use of so-called special opportunity funds.

1. Private Equity Firms

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Private equity firms are investment management companies that specialize in direct investments in specific companies as opposed to holding portfolios of financial assets. Private equity managers often possess a wide range of industry knowledge and have advanced management expertise. As investment management professionals who primarily manage client money without contributing their own capital, to carry out private equity investments private equity firms first sponsor and create private equity funds to pool investors' money. Depending on potential investment targets, private equity firms may set up either regular private equity funds or special opportunity funds.

Private Equity Investments

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A typical private equity investment target would be a company that has the potential market and growth opportunity but whose current management can't operate the company profitably. A private equity firm would come in and buy out the company's equity stakes using money that investors have contributed to its

private equity fund, plus any additional borrowed money. Public companies can also bought and taken private. These are normal private equity investment operations. Private equity firms usually exit their investments, after making a company profitable, by selling them to other private investors or in an initial public offering.

Special Investment Opportunities

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Other private equity investment opportunities may arise in special situations such as company bankruptcy restructuring or distressed debt purchases. Many private equity firms have expertise in such special investment opportunities, as the investments involve improving operations of poorly managed companies. Special investment opportunities often bear higher risks when a company's future is uncertain. Therefore, private equity firms usually would set up special opportunity funds to attract only investors who are willing to participate in such ventures.

Special Opportunity Funds

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Money raised from special opportunity funds is used solely for special investment opportunities. Investing in a bankruptcy restructuring, for instance, investment managers of a special opportunity fund would buy out senior creditors of the company in a bankruptcy proceeding. Because the bankruptcy filing has forced the company's equity holders to lose their investment, as the new major creditor of the company, the special opportunity fund would work out terms with other junior creditors under court supervision and eventually bring the company out of bankruptcy. Investing from a bankruptcy proceeding can be extremely low cost, often just pennies on the dollar, with potentially high rewards when restructuring efforts later succeed.

What Are Private Equity Funds?

Function

The purpose of this type of investment is to provide a way for institutional and individual investors to pool their money together and invest in equity positions. By putting their money together, these investors can take advantage of economies of scale and make larger returns on their investments. With this type of fund, investors can become partial owners of promising companies and experience substantial amounts of growth.

Money Manager

One of the features of a private equity fund is the money manager. A money manager is in charge of making the investment decisions on behalf of the fund. The money manager does all of the research dealing with potential companies in which to invest. The money manager is typically very experienced in the financial markets and business management. This manager makes it possible for the investors to utilize a passive investment approach.

Strategy

Private equity funds can generate profits in many different ways. One of the most popular strategies that private equity funds use is to buy a company that is not performing well and take it private. The private equity fund can then put the proper management in place and get the company back on track. After improving the performance of the company, the equity firm can then take the company public and generate large returns through an initial public offering.

Benefits

Private equity funds provide some benefits to the companies that they acquire. Private equity funds are generally very good at what they do. They are talented at identifying the problems with in a company and solving them quickly. Private equity funds have turned around some companies that were in very bad shape prior to being acquired. This saves jobs and it helps investors make a return at the same time.

Drawbacks

This type of investment vehicle also has a few drawbacks. One common criticism is that these funds do not look at the long-term prospects of the company when making changes. They only take the shortest route possible to trying to increase the value of the company. Another potential problem with private equity funds is that you have to be a wealthy individual or institutional investor to get involved

What Is Private Equity Placement?

Companies fund start-up operations and expansions by raising equity investment. There are two types of equity investments. Public equity is obtained through a public offering of stock which will trade on the public stock exchanges. Private equity comes from a direct investment in the company by an individual or institution and the ownership shares, or stock, are restricted from trading on a public exchange for a period of time or until the issue is registered and converted to freely trading stock.

Types
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A private equity placement to individuals is done through the issuance of a Private Placement Memorandum, which states the full terms of the deal, discloses important facts about the company and states all the things that could make the investment fail. Venture capitalists are institutional investors who invest large amounts of money through customized agreements that may include seats on the company's board of directors and special structuring of the amount and issuance of ownership shares.

Function
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Private equity placements are often used to provide large amounts of funding for start-ups or companies that are too small to issue a successful public offering. This money is used to hire staff, manufacture prototypes, obtain patents and trademarks, and set up business operations.

Function
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The first round of private placements is sometimes called the FFF round (friends, family and fools) or seed round. The amount raised ranges from a few thousand dollars to $1 million or more and is documented by a private placement memorandum, accredited investor questionnaire and subscription agreement. Following rounds of private equity generally come from institutional investors and range from approximately $500,000 to $10 million and are negotiated placements with different ownership and performance agreements.

Significance
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Private investors seek ownership in a young company that they expect to grow into a thriving enterprise. They accept stock in the hope that the value of the company will grow and it will perform an initial public offering (IPO) or be acquired by a larger company for hundreds of millions of dollars. A typical private equity investor is looking for ten to thirty times return on his investment.

Considerations
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Private equity investing requires knowledge and skill. For this reason investments in private placements are restricted to accredited investors who meet or exceed specified levels of income and net worth that indicates they are wealthy enough not to be financially harmed if their investment becomes worthless. Family and friends are exempt from the accredited investor rule but the entrepreneur must be able to prove a close association with anyone investing under this exemption.

Misconceptions
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Although 2007 saw $575 billion in private equity placements, not all those deals resulted in profits for the investors. While it is possible to be an early investor in the next Google or Apple, it is also probable that an early stage investment will become worthless and since it cannot trade on the public securities exchanges it may be impossible for the investor to sell his investment if he needs the money.

Types of Private Equity Funds

Private equity is money that is invested into companies that are not publicly traded. The money may be invested at various times during the companies existence. Funds may be provided during its initial start up days, or be provided for specific expansion or purchase of equipment. The source of private equity is usually through individual investors and the use of a Private Placement Memorandum, which is similar to a simplified prospectus used in initial public offerings where the terms of the offering are stipulated. Private equity can be invested in exchange for an ownership position of the company or a promise to pay by the company or entrepreneur.

1. Venture Capital Funds

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Venture capital funds are the most commonly considered form of private equity. Venture capital funds refer to equity investments that are made into companies that are in the early stages of development and research. Venture capital funds can be invested into any type of company, but are often associated with biotechnology and technology companies. Given when the investments are made and the type of companies they are investing in, often with unproven technology or product, the risk associated with this type of investment is high, requiring a potential rate of return to compensate for the risk.

Growth Capital Funds

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Growth capital funds are equity investments made into private companies who are relatively mature and established in their sector. Growth capital funds are often used to expand or restructure the operations of the company when the principal owner of the company may not want to shoulder the financial burden alone.

Mezzanine Capital Funds

Mezzanine capital funds are subordinated debt or preferred equity securities that while senior to the common equity, are the often the most junior component of a company's overall capital structure. This type of private equity is often used by smaller companies who cannot access the high yield market, but still provides an opportunity for capital beyond what they could secure from banks or traditional lenders.

Define Private Equity Firms

A private equity firm is a private group of investors who makes money through buying and selling and ownership of private equity. Unlike publicly-traded equity that is bought and sold on the stock market, private equity funds deal with equity that is not publicly available. Equity is a form of ownership similar to shares of stock. Private equity is unlike loans to the company, or debt, such as bonds or bank loans. Equity has a greater potential for risk and return than debt.

1. History
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Starting around 1980 private equity began to grow rapidly. This partially owes itself to the change in organization of many private equity firms to include limited partners. Before 1980 most private equity investors were wealthy individuals or corporations who invested directly. Private equity firms were severely impacted by the economic crisis of the late 2000s. In 2009 private equity firms raised $95.8 billion which was a severe drop from the $299.9 billion that the funds raised in 2008.

Features
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Private equity firms often organize themselves as limited partnerships. In a limited partnership, the managing partner has unlimited liability while the limited partners have limited liability. This makes it easier for passive investors to invest money without fearing that they will lose an amount greater than what was initially put into the company.

Benefits
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One of the main advantages that private equity has over publicly-traded equity instruments is that companies held by private equity firms do not need to register with the Securities Exchange Commission (SEC). Because private equity firms are not subject to public scrutiny, they can make controversial decisions more easily and take a long view. Investors that take the long view can allow for startup innovations that are not quite ready but have great potential. These innovations are said to provide patient capital.

Disadvantages

One disadvantage of private equity firms is that there is a lack of information about them due to the private nature of what they invest in. A lack of information can make investors uneasy and also hurts the ability of academics to study private equity firms.

Famous Ties
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Some major publicly-traded companies initially had private equity investors. Two of these include Microsoft and Dell Computers. Although both those companies later became public companies after an initial public offering (IPO) they were initially funded by private equity.

Economics of Private Equity Funds

Private equity is a type of corporate financing. Opposed to other types of corporate finance, such as issuing stock, the securities derived from private equity are not available to the public. It is essentially an investment in a firm, with the hope of gaining a share of its future profits. Private equity investors sometimes have a role in managing the company.

1. Private Equity
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Private equity is a type of financing available for firms and enterprises. The funds are derived from insurance companies, pension funds, individual investors or any institution that seeks to maximize returns on its investment. All of this money is then pooled into a private equity fund. It is called private because, unlike other funds, private equity cannot be freely traded on the stock market and is only available to a select group of investors. This private equity pool is then invested in one or more companies that need the funds. When these companies exhibit positive profits, these gains are then funneled back to the investors, providing a return.

Reasons for Private Equity

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Companies may require funding for survival or expansion. Private equity offers numerous advantages over other types of financing such as floatation. Private equity companies typically have an active role in the management of the company, as they will receive a portion of the profits. Unlike public stocks, private funds do not have to be transparent. Private equity may be tuned to the needs of individual companies.

Types of Private Equity

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The type of private equity on offer depends on both the type of investor and the company receiving it. The simplest type of private equity may arguably be angel capital, where wealthy individuals invest a portion of their wealth in new firms or

startups. The investor in this case rarely has any formal managerial position with the company but is instead more focused on earning a portion of the company's profits at a later date. Another type, called informal private equity, involves a group of investors who make a series of smaller investments that the private equity company will in turn use for corporate financing. Organized private equity is made up of a series of issuers, intermediaries and investors, all of different sizes and types.

Performance of Private Equity

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The 1980s saw an expansion of private equity, as investors realized that the returns in the private equity market were substantially higher than that of other financial markets in preceding decades. However, private equity has its drawbacks as it can be somewhat riskier than other investments. Furthermore, private equity is not very liquid, as investors typically have to wait for a return on their investments. During the 1980s, the returns of private equity investments dropped dramatically. This was primarily due to a fall in startup investments and a turn to leveraged buyouts.

Private Placement vs. Private Equity

To fund its operating activities, a company can raise cash on financial markets, such as the New York Stock Exchange or Hong Kong Stock Exchange. The firm also can work with investment bankers to privately place, or sell, its equity or debt securities. Investment bankers help all organizations, including academic institutions, raise money by selling financial products to private-equity firms.

1. Private Placement
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A private placement is a transaction in which a company raises money directly from private investors. For most businesses, including the financially stable ones, being able to raise operating cash merely constitutes table stakes -- that is, the minimum required to keep them in the competitive game. A company turns its attention to private placements if it is unable -- or unwilling -- to raise cash via conventional public markets, such as the London Stock Exchange. This may result from a bad economy, prohibitive rates on credit markets, high corporate indebtedness or mediocre operating performance. In a typical private placement, the issuing firm reaches out to investment bankers who in turn place, or distribute, the company's debt and stock products to a small number of investors.

Private Equity

Private equity is cash that investors pour into a company not listed on a financial exchange. The term also refers to money invested in a business to un-list, or delist, it from a financial market -- that is, to buy current shareholders out and convert the company into a privately held company. Private equity often has a strategic impact in an industry's competitive landscape, because the un-listing of a major player could recast the field of organizations in the race to be market leader. This might happen if other publicly traded businesses have access to more liquidity on credit markets and can parlay their resources to grow faster than the privately managed institution. Sponsored Links Open Free* Sharekhan A/c Low Brokerage Fee For Online Trading. Open Account Now! www.Sharekhan.com

Relationship
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"Private equity" and "private placement" are distinct terms, but they interrelate in investment activities. By placing its products through private channels, a company is -- in essence -- reaching out to private investors who ultimately become privateequity holders once they inject cash into the business. Similar to shareholders of a publicly held company, private-equity holders may receive periodic dividends. They also might reap substantial profits if the privately help company ultimately decides to issue common shares on a public exchange.

Personnel Involvement
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Various professionals help companies raise operating funds through private outlets. Besides investment bankers, financial analysts and accounting managers review corporate performance data and recommend the best time to seek private equity. Institutions such as private-equity firms and hedge funds also weigh in on private fundraising, providing cash if money-seeking businesses meet their investment targets.

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Private Equity Vs. Venture Capitalist

The terms private equity and venture capitalist are often used interchangeably by many, and they are both kinds of investors. Yet, in reality, there are differences between the two, mostly in their

structure, investment style and ultimate goals. Understanding these makes it clear how private equity and venture capitalists differ. Read more: Private Equity Vs. Venture Capitalist | eHow.com http://www.ehow.com/about_6498746_private-equity-vs_-venturecapitalist.html#ixzz26LHmMycI

Structure

Private equity and venture capitalists usually have very different structures. Venture capitalist vehicles usually pool the money of wealthy investors and institutions and are inherently more prone to risk, because outsized returns are key. Private equity, by contrast, is usually a firm that gets its funds from investments in public and private companies, as well as rich individuals and institutions. Private equity tends to take on more conservative projects, as it is more concerned with securing a profit.

Potential Investments for Venture Capitalists

Private equity and venture capitalists tend to invest in very different projects. Venture capitalists are more prone to look for riskier and/or start-up companies that have greater potential to result in large returns. Venture capitalism firms are often headed by an investor or group of investors that are experts in their fields, such as technology, and thus, will also offer to help management by offering their advice. Sponsored Links o Share Trading Online Get a Demat, Savings, Trading & MF All-in-1 Kotak Account. Sign Up! www.KotakSecurities.com

Potential Investments for Private Equity

On the other hand, private equity often looks for more established companies to buy stock in and provide loans to, so as to leverage their potential for greater returns. Yet, because their gains are therefore contingent on the company being able to repay debt, private equity often does not want to take on companies that are too risky and may default. So while venture capitalists usually only invest in a company's equity (stock), a private equity deal will usually involve equity and debt. Private equity will not necessarily be experts in their fields, able to offer expertise, but will insist on having management input to ensure that a company's cash flow and earnings are on track to pay back debt.

Funds

When a private equity firm buys a company's shares, the owners usually get a payout as these firms usually deal with mature businesses that have demonstrable value. Venture capitalists, on the other hand, deal with smaller companies and usually inject money directly into the business for things, such as operating expenses, and the owners must wait until the business is off the ground to reap any reward.

Managing Risk

The main risk to a venture capitalist, dealing with a smaller company, is that his stake in the company could become diluted if the business needs more financing--as it often does-and brings in other investors. Therefore, original venture capitalists may insist on owning prefer shares that are separate from common stock. A private equity firm, on the other hand is mostly concerned with the company's progress in paying debt on time

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Private Equity Investors Vs. Venture Capital Investors

There is much confusion between the terms "private equity" and "venture capital." Strictly speaking, private equity includes venture capital, together with leveraged buyouts (LBOs), management buyouts (MBOs), bridge and mezzanine investments, and other private investments. However, in practice the difference is often blurred. Venture capital firms engage in other private equity deals, and private equity investors can specialize solely in venture capital activities. Read more: Private Equity Investors Vs. Venture Capital Investors | eHow.com http://www.ehow.com/about_6583744_private-vs_-venture-capitalinvestors.html#ixzz26LI0rF96

Private Equity Vs. Venture Capitalist What Are the Two Forms of Equity Infusion?

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1. History
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The first private equity deal can be traced back to 1901, when J.P. Morgan bought Carnegie Steel Co. for $480 million in what now can be classified as a classical buyout. Morgan wanted to leverage Carnegie's market share to dominate the U.S. steel industry so that he could set higher prices for the products of his steel empire. But private equity and venture capital did not really take off until 1958, when Congress passed the Small Business Investment Act, which allowed the creation of licensed venture capital firms called Small Business Investment Companies (SBICs). These companies could borrow from the government at below-market interest rates. In turn, they had to invest in technological ventures. The Internet and technological revolution greatly improved the fortunes of venture capital investors. With world-class companies like Google and Facebook receiving venture capital support at one point or another, venture capital firms are now considered to be one of the driving forces behind technological innovation. Private equity got its boost from the cheap money available in the 2000s, when the Federal Reserve kept interest rates low for a prolonged period of time as a response to the dot-com bust. In the recession of 2008-2009, both private equity and venture capital investors suffered from the general weakness of the economy.

2. Deals
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Private equity and venture capital investors generally invest in high-risk deals, getting a share of the enterprises they fund. Private equity investors have greater scope. They usually invest in established companies, while start-ups and earlystage enterprises are often financed by venture capital companies.

Types of Private Equity Funds

Private equity is money that is invested into companies that are not publicly traded. The money may be invested at various times during the companies existence. Funds may be provided during its initial start up days, or be provided for specific expansion or purchase of equipment. The source of private equity is usually through individual investors and the use of a Private Placement Memorandum, which is similar to a simplified prospectus used in initial public offerings where the terms of the offering are stipulated. Private equity can be invested in exchange for an ownership position of the company or a promise to pay by the company or entrepreneur.

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1. Venture Capital Funds

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Venture capital funds are the most commonly considered form of private equity. Venture capital funds refer to equity investments that are made into companies that are in the early stages of development and research. Venture capital funds can be invested into any type of company, but are often associated with biotechnology and technology companies. Given when the investments are made and the type of companies they are investing in, often with unproven technology or product, the risk associated with this type of investment is high, requiring a potential rate of return to compensate for the risk.

Growth Capital Funds

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Growth capital funds are equity investments made into private companies who are relatively mature and established in their sector. Growth capital funds are often used to expand or restructure the operations of the company when the principal owner of the company may not want to shoulder the financial burden alone.

Mezzanine Capital Funds

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Mezzanine capital funds are subordinated debt or preferred equity securities that while senior to the common equity, are the often the most junior component of a company's overall capital structure. This type of private equity is often used by smaller companies who cannot access the high yield market, but still provides an opportunity for capital beyond what they could secure from banks or traditional lenders.