What is Private Equity:
Private equity first emerged in the early 1980s, with Kohlberg, Kravis and Roberts (KKR) opening the first, and still among the largest LBO (Leveraged Buy Out) firms. The logic for LBO firms, at least initially, was this: Publicly traded companies are forced to focus on extremely short-term (often quarterly or monthly) results, thus making decisions which may not be in line with their long-term goals. Going ‘private’ or delisting from the exchanges allows them to focus on these goals. Leveraging, that is, taking debt to buyback these shares as well as spending on longer-term expansion, etc allowed managers to run their companies the way they wanted to. Moreover, the LBO firms were often run by investment bankers and consultants who contributed significant financial and industry expertise. Over time, however, the deals also began to be ‘hostile’, that is, the LBO managers perceived value in firms which they felt were mismanaged, so they would buy them out, restructure them, and then sell them off once more.
The other side of private equity investment comes from the world of venture capital, where small companies that need to grow but are cash-strapped and too small to list on exchanges approach (or are approached by) VC firms to take a stake in the company, as well as hand-hold them onto a growth path.
Types of Private Equity:
Private equity investments can be divided into the following categories:
Leveraged buyout, LBO or simply Buyout: refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these transactions are typically more mature and generate operating cash flows.
Venture capital: a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business. Venture capital is often sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth.
Growth capital: refers to equity investments, most often minority investments, in more mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.
Other strategies:
Other strategies that can be considered private equity or a close adjacent market include:
Distressed or Special situations: can refer to investments in equity or debt securities of a distressed company, or a company where value can be unlocked as a result of a one-time opportunity (e.g., a change in government regulations or market dislocation). These categories can refer to a number of strategies some of which straddle the definition of private equity.
Mezzanine capital: refers to subordinated debt or preferred equity securities that often rep