Private Equity



Private equity is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies. Private equity isn’t new-it’s been around in various forms for almost 25 years, including the Barbarians at the Gate-style hostile takeover of RJR Nabisco by Kohlberg Kravis Roberts (KKR) in 1989. Private equity is booming, with buyout firms poised to raise more than the previous record of $215 billion, set in 2006. PE is a broad term which commonly refers to any type of non-public Ownership Equity securities that are not listed on a public exchange. PE is very much a ‘people’ business and the investment professionals involved and their interaction as a team will be a key in determining the return on the fund. Equity is generally accessed by companies that do not have the operating history or track record to access lower cost capital alternatives, but need capital for growth or expansion. This equity is neither a silver bullet nor a dark force.


Buyout houses are raping the public markets. Buyout groups are just like the old conglomerates. Buyouts have generated a growing portion of private equity investments by value, and increased their share of investments from a fifth to more than two-thirds between 2000 and 2005. Buyout and real estate funds have both performed strongly in the past few years in comparison with other asset classes such as public equities, certainly a factor in the bumper fundraising that both have enjoyed of late. Buyout people who were kings of the hill and masters of the universe were suddenly seen as normal people.


European venture capital is showing a steady increase in the number of successful VC-backed companies and notable exits. European private equity fundraising has passed the 100 billion threshold to reach 112 billion in 2006 only, similar level to the new capital raised through IPOs on the European Stock Exchanges in the same period. European private equity and venture capital provides a vital source of finance for growing companies across all industry sectors. European focused funds account for 26% of the global total, whilst funds focusing on Asia and the Rest of World account for the remaining 11%.


Blackstone took itself public on June 22; its IPO, the largest since 2002, raised $4. Blackstone’s performance has even been worse than that of Fortress Investment Group, a manger of private equity and hedge funds that went public in February. Blackstone is the largest private equity company in the world. Blackstone’s real estate holdings have done even better – up 29% per year since 1991. Blackstone set a record in 2006 by completing $101 billion in buyouts, amid historic levels of fundraising and deal activity in the U.S. Blackstone, like many other private equity firms, has made much of its money in the buyout business-acquiring undervalued public companies using borrowed money, taking them private, improving them, and reselling them at a profit. BLACKSTONE’S RECENT $39 BILLION acquisition of Equity Office Properties Trust showed that few deals are too large for this new breed of investor.


Investors in private equity funds include wealthy individuals, insurance companies, college endowments and pension funds.


PE is responsible for 1 in every 5 dollars spent. Private equity is an investment asset class describing private investments in privately held (as opposed to publicly traded) companies. Equity is a favored asset class for professional managers because it has historically produced superior returns. PE is interested in the longer-term performance of the company.

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