PRIVATE EQUITY

Analysis of Private Equity

Private equity investment

Introduction

Private equity is an investment is asset class comprised of equity securities of companies that are not publicly traded on the stock exchange. A private equity investment will most likely be made by a private equity firm or venture capital firm. Each investor has its own objectives and investment strategies. The basic purpose of all the private equity investments is to provide working capital to the company for expansion or restructuring of the management with an aim at improving the efficiency. The private equity industry for UK is the largest and most dynamic in Europe. It accounts for more than half of the whole European market and second largest after United States. The sheer size of the industry is reflective of the growth this industry has experienced over the years. Over the past six years, private equity funds have raised approximately £70 billion of capital for investment into unquoted business of UK. Considering its profitability it is not difficult to predict that private equity investment will have a major role to play in the revenue expansion of the businesses in future.

Discussion

Most common private equity investment strategies include leveraged buyouts, venture capital, growth capital, mezzanine capital and distressed investments. A leveraged buyout is an investment in which a company obtains mainstream control of a mature firm in an attempt to obtain control where as in a growth or venture capital venture capital investors usually invest in young or promising companies with very little control. Mezzanine capital refers to the preferred equity or subordinated debt instruments that are most junior portion of a company's capital structure that is senior to company's common equity. Companies can borrow additional capital beyond the level of capital that they can obtain through traditional channels such as bank loans. A distressed investment is the category of investments that refer to the investment in securities of financially disturbed companies.

After briefing the different categories of private equity investments, lets us discuss merits and demerits of private equities.

Advantages of private equity

There are several advantages of investment in private equity firms as compared to other investment strategies which are reviewed in the following paragraphs.

Stable, long term investor base

Private equity investor enjoys a long term stable investor base (Morgan, 2010, p.1). This can be of numerous benefits to the private equity firms, the most prominent being the time required to grow the business. It takes time to change the culture of a company, design an effective strategy and execute on a business plan. Private equity investment is a long term investment and consistent with the business building timeline. Private equity firms enjoy the freedom to implement their plan without external pressures of short term results and shifting of investor base. Companies that are backed by private equity are often made more efficient and yield higher profits. This efficiency not only benefits the private equity firm but also the target company. The acquiring firm uses its expertise and skills ...