Private Equity Notes

+What Is Private Equity? (investopedia.
com)
- invests in or acquires private companies that are not listed on a public

stock exchange
- Institutional and retail investors provide the capital for private equity
- Private equity firms earn money by charging management and
performance fees from investors in a fund.
- Pricing of shares for a company in private equity is determined through
negotiations between buyers and sellers and not by market forces.
- The rights of private equity shareholders are decided on a case-by-
case basis through negotiations instead of a broad governance
framework that typically dictates rights for their investors in public
entities.
Types of Private Equity

- Distressed Funding
- Leveraged Buyouts
- Real Estate Private Equity
- Fund of Funds
- Venture Capital
How can individual investors (accredited investors) invest in private

equity?
- Fund of Funds
- Exchange-Traded Funds
- Specialized Purpose Acquisition Company
Introduction:
- The rise of private equity?
- Traditional Roles + Contemporary Roles
- Competition or cooperation?
Public Equity vs Private Equity:

- Explain what equity means
- What is public equity?
- What is private equity?
Types of Private Equity:

- Distressed Funding
- Leveraged Buyouts
- Real Estate Private Equity
- Fund of Funds
- Venture Capital
Introduction:
The private equity market has seen robust growth in recent years, valuing the
industry at $10 trillion. However, this lucrative market was not always lauded;
it was perceived as a bellicose industry and its members as mercenaries. This
alternative investment gained traction because of its high returns on
investments, which were not possible through conventional investments, i.e.,
stock, bonds, and money markets. With time, the private equity has expanded
its services by introducing a credit arm, which also oversees leveraged
buyouts. Furthermore, private equity has transformed from cut-throat
competition to convoluted business relationships with its competitors. For
example, the Zendesk takeover is a result of an alliance between different
private equities like Blackstone, Apollo, H&F, and Permira. The industry,
which was once overlooked by governments, now receives the same scrutiny
reserved for large corporations.
Public Equity vs Private Equity:
Equity means ownership in a business. For the general public, this option is
exercised by purchasing a company’s stocks via the Stock Exchange. In
return for investing in the business, investors earn dividends (subject to each
business) and capital gains, i.e., increase in the stock price. Purchasing
through the exchange is called public equity because the stocks are available
to anyone for purchase. On the other hand, private equity means purchasing
ownership of a business which is not only unlisted but also identifies itself as a
private company. Due to the unregulated nature of private equity stake, this
investment option is exclusive to accredited and institutional investors.
Once such firms accumulate a large pool of funds called private equity fund,
these entities identify promising businesses, capable of generating high
returns on investment. With the target in mind, the private equity firm takes
over the business, restructuring the management and the company’s
strategies to yield high profits in the foreseeable future; the returns less
management fees are then redistributed to the investors.
Private equity firms come in various forms. The most common types are:
1) Real Estate Private Equity (REPE)

This form of private equity is involved in investing, operating, and selling
properties to pay returns to its investors. This should not be misidentified with
real estate investment trusts (REITS), which are publicly traded shares and
generate income primarily through rentals.
One characteristic of REPE is that it is a “closed-end” fund, meaning that
investors are paid back their funds after a specified time period.
REPE firms can be categorized according to risk-tolerance: Core, Core-Plus,
Value-Added, and Opportunistic. ‘Core’ represents investments which have
low risks/returns. Such firms experience up to 8% returns and take on up to
50% leverage. Companies in ‘Core-Plus’ witness up to 11% returns, and take
on up to 60% leverage. ‘Value-Added’ firms are more risk-seeking, generating
up to 16% returns and carrying up to 75% leverage. Lastly, ‘Opportunistic’
firms identify and invest in high-risk realty markets, rewarding them with 16%+
returns but submerging into high leverage. The values aforementioned are
rough benchmarks and can vary according to circumstances.
2) Distressed Funding
As the name states, P.E invest in firms at risk of liquidation or at the cusp of
bankruptcy, in hopes of restructuring and turning the organization around. The
reason for such high-risk investments is influenced by the common notion of
high-risk, high return. Before participating in the firm’s decision making, P.Es
purchase the company’s debt, expecting equity conversion during
restructuring. After gaining controlling-interest in the business, P.Es can then
implement its plans. Direct involvement in the restructuring can ensure better
asset utilization, improving the company’s valuation.
3) Leveraged Buyouts
A leveraged buyout refers to a P.E firm taking over a company by leaning on
higher debt and lower equity. Firms engage in such activity because they can
generate greater returns on investment. There are four outcomes of a
leveraged buyout: the repackaging plan, the savior plan, the split-up, and the
portfolio plan.
The repackaging plan involves the P.E firm taking over a public company,
privatizing it, restructuring (repackage) it, and then selling its equity through
IPO. Secondly, the savior plan refers to P.E firms purchasing failing
businesses and converting it to a high-valued enterprise, which is sold to the
highest bidder. The split-up means taking over a company and selling its
constituents, resulting in the firm’s dismantlement. Lastly, portfolio plan is a
more optimistic approach where the P.E firm acquires another business in the
hopes of the new, resultant company performing better through synergy.
4) Venture Capital
Venture Capitals (V.Cs) are life supports of start-ups. Such enterprises invest
early into nascent businesses in hopes of cashing out at IPO or even before.
V.Cs intervene at different stages of a start-up’s cycle. Such stages are called
series A, B, and C funding; though these funding phases can extend up to
even E funding, most start-ups turn public after series C. Due to the
cornucopia of funds invested, V.Cs have a large influence on how the
company operates. Having a personal stake galvanizes V.Cs to steer start-
ups in a profitable direction by monitoring the management and day-to-day
operations.

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+What Is Private Equity? (investopedia.

- invests in or acquires private companies that are not listed on a public

Types of Private Equity

How can individual investors (accredited investors) invest in private

Public Equity vs Private Equity:

Types of Private Equity:

Public Equity vs Private Equity:

1) Real Estate Private Equity (REPE)

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