Private equity is way to invest in some publicly traded assets with the intention of taking it private. Private equity funds invest in liquid assets i.e companies. Private equity consists of investor and funds that make investments directly into private companies or conduct buyout of public companies that result in delisting of public equity.
The private equity raised funds from angel investors, Institutions, insurance companies, banks, funds of funds etc. The fund is used for making acquisitions, strengthen the balance sheet, expansion of working capital etc.
Private equity investment can be done in two ways :-
A direct investment.
An investment through a fund.
In direct investment, a direct investor participates in privately placed offerings and is responsible for the investment process. It is very time consuming and costly and also requires vast knowledge and experience in the private equity market.
Investment through a fund, the investor have a better knowledge about the real conditions of the firm, and potential risk factors.
Characteristics of private equity:-
The structure of private equity funds is like a fixed limited partnership, therefore early withdrawal is not possible. Private equity investments are liquid because when there is a possibility of secondary sale of fund shares, investor can expect a substantial discount on the net asset value if selling in the secondary market.
The private equity market is not transparent. The lacking of transparency is a necessary for achieving the results, because substantial part of the returns depends on the inside information. To participate in private equity, the investor needs a minimum amount of capital commitment. This minimum amount differs from fund to fund, but it is a small fraction of the wealth of an investor. So the potential for diversification is highly restricted
Types of Private Equity:-
Private equity investment mainly divided into the following categories:-
Leveraged Buyout:- leveraged buyout refers a strategy of making investments as part of a transactions in which a company, business assets is acquired from the current shareholders with the use of financial leverage. The companies involved in such transactions are more mature and generate operating cash flows.
Venture capital:- It is a sub-category of private equity that refers to made equity investment in less mature companies for the purpose of early development or expansion of business.
Growth capital:- It refers to made equity investment in companies who are looking for capital to expand or restructure operations, enter into new markets or finance a major acquisition without a change of control of the business.
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