Private Equity

The Private Equity sector is broadly defined as investing in a company through a negotiated process. Investments typically involve a transformational, value-added, active management strategy. Private Equity investments can be divided into the following categories:

• Venture capital: an investment to create a new company, or expand a smaller company that has undeveloped or developing revenues.
• Buy-out: acquisition of a significant portion or a majority control in a more mature company. The acquisition normally entails a change of ownership
• Special situation: investments in a distressed company, or a company where value can be unlocked as a result of a one-time opportunity (Changing industry trends, government regulations etc.)

Private equity firms generally receive a return on their investments though one of three ways: an IOP, a sale or merger of the company they control, or a recapitalization. Unlisted securities may be sold directly to investors by the company (called a private offering) or to a private equity fund, which pools contributions from smaller investors to create a capital pool.

Considerations for investing in private equity funds relative to other forms of investment include:

• Substantial entry costs, with most private equity funds requiring significant initial investment (usually upwards of $1,000,000) plus further investment for the first few years of the fund.
• Investments in limited partnership interests (which is the dominate legal form of private equity investments) are referred to as “illiquid” investments which should earn a premium over traditional securities, such as stocks and bonds. Once invested, it is very difficult to gain access to your money as it is locked-up in long-term investments which can last for as long as twelve years. Distributions are made only as investments are converted to cash; limited partners typically have no right to demand that sales be made.
• If a private equity firm can’t find good investment opportunities, it will not draw on an investor’s commitment. Given the risks associated with private equity investments, an investor can loose all of its investment if the fund invests in falling companies. The risk of loss capital is typically higher in venture capital funds, which invest in companies during the earliest phases of their development, and lower in me//anine capital funds, which provide interim investments to companies which have already proven their viability but have yet to raise money from public markets.