Corporate Finance Private Equity
Private equity is an investment class that consists of equity securities (usually common and preferred shares) of operating companies whose shares are not public traded or listed on a stock exchange, hence the term “private”. Being private, these types of investments are not usually subject to public knowledge or scrutiny and are often not subject to government regulations. An example of private equity investment is funds put into the hedge funds where fund managers are given much leeway by their investors as to where they will invest the monies. As long as returns are satisfactory and commensurate with the risks taken, then investors would have no qualms or reasons to complain.
Private Equity Firm
Another type of private equity which has attracted so much adverse public attention is funds used in leveraged buyouts (LBO). These are quick and dirty type of acquisitions that use only a minimal capital by the investors to fund the acquisition with the rest of the money coming from bank loans and financing from external sources. Their target companies are those operating in mature or sunset industries which generate a lot of free cash flows. What these investors do after acquisition is to split these firms and sell the individual parts or departments to other firms. The end result of all these subdividing are lost jobs and jobless employees hence the bitter reaction to these “corporate raiders” who make a profit only for themselves.Other interesting forms of private equity are the venture capitalists who specialize in funding nascent start-up firms with tremendous growth potentials. Those who risk their capital in more mature firms in mature or “sunset” industries are called growth capitalists who often are content with minority stakes in a company and be just “silent partners” without control or change in the top management. Some private equity investors prefer to invest in high-risk or very long term projects such as energy and power facilities. Some go into public infrastructure funded by the government with subsequent guaranteed return on investments through the BOT scheme or variations thereof (build-operate-transfer arrangements). Still others prefer mezzanine financing which is a form of interim or temporary financing. This approach affords a quick exit when necessary since repayment due dates are very short. Some private equity go into merchant banking which is the private placement of funds into privately-held companies. These private firms are usually family-owned corporations whose founder and patriarch is generally averse to diluting management control by issuing listed shares.