private equity Flashcards
What is Private Equity?
any equity investment in a company which is not quoted on a stock exchange
Private equity typically refers to investment funds organized as limited partnerships that are not publicly traded and whose investors are typically large institutional investors, university endowments, or wealthy individuals.
Further:
Private Equity is a type of equity and an asset classes consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange.
Common investment strategies in private equity include:
leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
what is leverage buyout
A leveraged buyout (LBO) is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company’s cash flow is the collateral used to secure and repay the borrowed money.
Debt, which has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. The cost of debt is lower because interest payments are tax deductible whereas dividend payments are not.
A special case of a leveraged Buyouts
a Management Buyout (MBO). In an MBO, the incumbent management team (that usually has no or close to no shares in the company) acquires a sizeable portion of the shares of the company. Similar to an MBO is an MBI (Management Buy In) in which an external management team acquires the shares.
what is venture capital
Venture Capital (VC) is a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated rapid growth.
what is venture capitalist
A venture capitalist is a person who makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments
what is growth capital?
Growth capital (also called expansion capital and growth equity) is usually a minority investment in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business
why investor seek growth capital
Companies that seek growth capital will often do so in order to finance a transformation event in their life cycle.
Growth capital can also be used to effect a restructuring of a company’s balance sheet, particularly to reduce the amount of leverage (or debt) the company has on its balance sheet.
what is Distressed Investments
Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding such distressed-debt creates significant risk due to the possibility that bankruptcy may render such securities worth zero.
Mezzanine Capital
Mezzanine Capital is any subordinated debt or preferred equity instrument that represents a claim on a company’s assets which is senior only to that of the common shares.
Mezzanine can be structured either as debt (either an unsecured and subordinated note) or as preference shares and as a result of these its generally a more expensive financing source.
mezzanine capital in leverage buyouts
In Leveraged Buyouts, Mezzanine Capital is used in conjunction with other securities to fund the purchase price of the company being acquired. Typically, mezzanine capital will be used to fill a financing gap between less expensive forms of financing (senior loans and high yield financings) and equity.
what is hedge fund?
A hedge fund is an investment fund that pools capital from accredited individuals or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques.
different between hedge fund and mutual funds
Hedge funds are generally distinct from mutual funds, as their use of leverage is not capped by regulators, and distinct from private equity funds, as the majority of hedge funds invest in relatively liquid assets.
