C. Distinguish between public and private equity securities

Question 1

PE Characteristics

Answer 1

Less liquidity
– Share price is negotiated
– More limited firm financial disclosure
– Lower reporting costs
– Potentially weaker corporate governance
– Greater ability to focus on long‐term prospects

Compared to publicly traded firms, private equity firms have lower reporting costs, greater ability to focus on long-term prospects, and potentially greater return for investors once the firm goes public. However, private equity investments are illiquid, firm financial disclosure may be limited, and corporate governance may be weaker.

Private equity securities are typically issued to qualified institutional investors.

with less pressure from public shareholders, a private equity firm is typically more able to focus on long-term performance.

Private firms have fewer financial disclosure requirements, and therefore lower reporting costs, because they are not listed on an exchange. Private firms generally have greater ability to focus on long-term results because they do not experience pressure from public shareholders.

Venture capital providers invest in firms that are early in their life cycles. Stages of venture capital financing include seed stage, early stage, and mezzanine financing. In a leveraged buyout, an investor purchases all of a public firm’s equity, taking the firm private. In a private investment in public equity (PIPE), an investor purchases private equity issued by a public firm.

Question 2

Types of Private Equity Investments

Answer 2

– Venture capital
– Leveraged buyouts (LBO and management buyout (MBO)
– Private investments in public equity (PIPE): Selling of publicly
traded common shares or some form of preferred stock or
convertible security to private investors. In the U.S. a PIPE offering
may be completed as an unregistered private placement or may
be registered with the SEC on a Registration Statement .

• Venture capital firms
– Early in their life cycles
– Funding to finance development and growth
– Long holding periods
– (Illiquidity and high risk typical)
• PIPEs sold by public firms that need capital quickly. Sells private
equity to investors. Reasons ‐ growth opportunities, distress, large
amounts of debt.