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Private Equity Investment Become an Important Segment of Capital Market

Mar 1, 2008
In recent years, there has been a significant increase in the investment in private equity market. Private equities, alternatively known as investment capitals, are equity securities of a company whose stocks have not been listed on a public exchange. This type of investment is mostly illiquid, and is regarded as an excellent source of long term investment.

In other words, private equity investment is not as liquid as publicly traded equity investment. In contrast to public equity, It is not mostly subject to any type of government policies or regulations. Also, a key difference between investment in private equities and shares of listed companies is that there is not any regular trading in the private equities.

One of the prime features of investment in private equity is that as in the case of other types, it does not involve payment of interest or distribution of dividend. But, investor usually receives earnings via appreciation of value between acquisition and exit, which in turn is usually through IPO or via trade sale. An investor of private securities also receives their returns through such sources as re-capitalization and via initial public offering. Other features of private equity investment cover in unlisted companies, providing of equity capitals, medium as well as long term investment horizon, and above all, hands-on investment style.

Investment in private equities can be done in a myriad of forms. Venture capital and Buyout and Acquisition Financing are among the two prime categories of private equity investments. In the case of venture capital, It is done in a small company which usually possesses a relatively huge growth potential.

In other words, it is a category provided by outside investors as well as professionals to a newly formed business unit with good growth potential. Al though venture capital investment is attached with a great degree of risk, mostly offers relatively good returns. This type of private equity investment is highly popular among newly formed companies with minimized operating histories and firms who are not able to raise their capital via a debt issue.

On the other hand, buyout and acquisition financing is a category in which private equity investments are done in established companies. In this case, these companies create value through restructuring of finance, mergers as well as acquisitions, corporate governance, and via large incentives to the management. Buyout investment takes several different forms such as management buyout and leveraged buyout. Management buyout is a type of acquisition through which a part or sometimes whole of a company is acquired by existing managers. On contrary, in leveraged buyout, also known as highly leveraged transaction, an investor acquires some or majority of a company's equity via borrowed money or debt.

Another popular type of private equity investment is mezzanine financing, which is a blend of equity and debt financing. Mezzanine financing, also referred to as subordinated debt, is mostly used for the purpose of expansion of existing companies. A key benefit of mezzanine financing is that it is treated as equity on the balance sheet of a company, thereby making it easier to gain standard bank financing. Different types of private equity investments also include consolidation or equity plays, Pre-IPO rounds of equity financing, and later stage turnaround situations.

A host of significant benefits could be derived through investing in private equity. One of the prime benefits is that it allows for growth capital and that too without any fixed expense. Another key benefit is that it enables financial flexibility, which in turn allows borrowing for other strategic purposes. Also, an advantage of private equity investment is that it involves minimized market risk. Above all, It is less competitive when compared to investing in public markets.

Understanding the importance of private equity investment, many firms have now come forward to provide superb services and advice in connection with private equity as well as venture capital. With an impressive workforce coupled with unparalleled knowledge and expertise, these firms provide their clients with effective advice on structuring and negotiating packages.
About the Author
Hunt Partners is a high end Executive Search firm providing search and human capital solutions for global and regional clients who require discreet search of top management and board level positions.
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