What is private equity?

Private equity generally consists of investments in companies which are not listed on stock exchanges. It is seen as a complement to more traditional financing providers, including banks and the public markets.

Generally, private equity is involved in transactions requiring longer term financing and associated with risk levels and risk types the more traditional sources of financing are unable to come to terms with. Additionally, often a more direct involvement in investments by the investor is required.

Private equity managers aim to generate significant capital gains by acquiring control or taking significant minority stakes, influencing and/or adjusting management of these companies to develop or transform their businesses and ultimately selling their stake after enhancing the value of the companies.

Generally, private equity investors acquire stakes that give them substantial access to their portfolio companies’ information, allow them to designate board members and management and even mandate decisions, if necessary. Additionally, the acquisition of substantial stakes is used by private equity managers to negotiate investment protections and incentive agreements, thus establishing a framework where interests of portfolio company management become very much aligned with those of the private equity fund.

The general private equity asset class opportunity arises because of inefficiencies created by the inability of traditional capital providers, the public capital markets and corporations to attract entrepreneurial minded management to take on the:
- perceived risk
- long investment horizon
- active involvement
- and corporate governance requirements
associated with the fundamental transformation of a company, successfully financing early stage and growth companies and providing replacement capital. Private equity managers generally establish 10 to 12 year closed-end non-reinvesting funds with an option to extend, which provide an appropriate time-scale to seek out and negotiate attractive investment opportunities, subsequently implement the development plans or transform the businesses concerned and ultimately realize capital gains.

Private equity managers’ commercial judgment, industry expertise and market timing are critical to their success. These competencies are of paramount importance in all areas and phases of the investment and business development cycle – opportunity, discovery, investment origination, negotiation, financing, business structuring, management, transformation and sale. An excellent private equity management team is capable of undertaking all of these responsibilities. Capital Dynamics uses its substantial experience, awareness and relationships to identify access and select the funds managed by private equity managers with these skills.

From its effective origins in the late 1960s, private equity in today’s form has grown into a global industry raising over $100 billion per year. Despite the considerable volume of assets and the high profile of some private equity transactions, information on the industry is scarce due to its low degree of regulation. In addition, even in the US, which is considered the most advanced private equity market, there still is significant room for new and promising managers to establish themselves by implementing consistent investment strategies and ultimately delivering attractive returns.