MERGERS ACQUISITIONS & PRIVATE EQUITY

Mergers Acquisitions & Private Equity

Mergers Acquisitions & Private Equity

Task 1

It is noted that private equity industry, majorly buyout investments (LBO) and venture capital (VC) has enormous growth during the last decade. In addition to this around USD 10 billion are invested by the investors in private equity partnership in 1991 and in the peak it is USD 180 billion which is invested in assets class during 2000 (See for example Jesse Reyes, Private Equity Overview and Update 2002). There is partial contribution of well published returns on private equity funds in the increase in investment in this area more specifically at the end of last decade. In addition to this, with the increase of entrepreneurship, there is a great focus arises for venture capital in the United States.

Private equity is referred as to the investment which is mostly done with limited partnership and in this process partnership or private equity firm is known as general partner (GP) and there is a limited partners (LPs) also, a limited partner is a wealthy individual investor or institution investor which provides huge capital. Each individual limited partnership is known as fund. LPs agrees to invest certain amount in a fund. Private equity fund was also known as leverage buyout investments previously. As mentioned previously these firms acquires company by utilizing small portion of equity and comparatively large portion of debt raised from outside financing (Kaplan & Schoar, 2005, pp. 1792-1795).

The concept of leveraged buyouts was appeared during 1980s and this area is focus of attention for investment in current decade. It is also predicted that these organizations will become a dominant form of corporate organization (Jensen, 1989, pp. 323-329). This is predicted keeping in focus at the argument of focus on combined ownership stakes in companies in which they invest, attractive benefits and incentives for professionals of these firms, and efficient, lean organization having little cost of overhead. Later private equity firm applied managerial compensation that based on their performance, capital structures that are highly leveraged, and their focus on active monitoring of the companies in which they have invested. It was observed that the prediction of Jensen became premature when junk market of bond was crashed after the end of investment bank; Drexel Burnham Lambert. In this condition it is observed that large number of high profile LBOs ended in bankruptcy and default. Certainly in 1990s, the leveraged buyout business disappeared. However, it was not end of leverage buyout business but scarcity in the business and the in the mid of 2000 the second boost of private equity firm is seen in the economy.

There is various sources performance in private equity firms. There are drivers that have direct effect on the operating efficiency of the company are referred to direct drivers and it affects directly to the operational efficiency of the business. There are secondary performance drivers that are referred as indirect drivers as theses drivers affect indirectly and non-operational ...