Archive for the ‘Private Equity Financing’ Category
-
Understanding Private Equity Funds – Everything You Need to Know
Private equity fund is a pooled investment from various private investors. Usually, investors bring along their funds and invest directly on private companies or business ventures or at other times, decide on buyout of public companies to facilitate a removal of a public equity.
The funds pooled together for a private equity fund is commonly secured from retail or institutional investors. The collected funds are then used to fund fresh business ideas, new business or enterprise technologies, expand working capital of an existing company, make further asset acquisitions and the like.
A person investing in a private equity fund is usually someone capable of committing large sums of money for long periods of time. As it is, private equity investments require long holding periods to facilitate a turnaround for a distressed company.
Typically, most private equity funds are structures as limited partnerships. Usually, the setup would require that the partnership be supported by a general partner who raises capital from cash-rich investors like pension plan and insurance companies, colleges and universities, foundations or high net worth individuals. These investors are identified as limited partners in the equity fund.
In this setup, it is normal that various components would first be agreed upon to establish the stake, claim and right of a limited partner. First of all, the term of the partnership is determined. On an average, this usually spans for ten years.
Secondly, management fees are usually settled in the case of a private equity firm’s decision to use the fund as an investment for expansion or further wealth generation. In this case, the management fee is used to pay the fund manager or fund generator.
Thirdly, as a matter of performance incentive (so as to increase the income-generation of the partnership, which is why partners invested in the first place), a carried interest is paid to the private equity fund’s management company. Here, a share of the profits of the fund’s investment is used.
Since it is expected that the private equity fund would later yield into profit, at the onset, it must be settled upon that part of the transfer of an interest must be secured to the fund. Since private equity funds cannot be openly traded, usually, they may be transferred to another investor amongst the involved partners.
It is most crucial during the legal structuring of the partnership, that the chosen fund manager be given enough power and discretion to conduct investments and control the affairs of the pooled fund. In this way, no influence by any limited partner may affect any investment option. Of course the fund manager would always have discussed restrictions, limitations and control which cancel out possibility of mismanagement of funds. In the end, it is important that restrictions on the General Partner be set.
It may be perplexing how some business investors would decide on investing their money on a high-cost, long-bond, long-pay of Return of Investment type of investment. However, since the 1970s, there has been a growing trend in the United States for this kind of setup, as apart from fostering business relations and strengthening existing companies, it has opened opportunities for private investors to obtain rights to huge public companies they cannot acquire individually.
Private Equity FAQ:
Question: How do private equity firms operate?
Answer: They raise money from investors and then buy equity in companies. They are negotiated deals not involving the stock market. Because they are private, there is no regulation. Frequently, they are providing startup capital or are buying a company that is in trouble. They make their money by either growing the startup or fixing the troubled company and then taking it public in about three years (they hope).
Question: What’s the difference between private equity funds and hedge fund?
I read in Business Weekly that pension funds, university endowments, and other big investors invest in hedge funds and private equity funds. An accompanying graph showed that private equity funds had much higher returns than hedge funds in 2006 and 2007, but also greater losses in 2008. What is the difference between the two? Do they invest in different products? If not, on what base would a pension fund choose whether to invest in one or the other?Answer: The two represent different asset classes, with their own returns cycles. The pension funds and other endowments seek exposure to different asset classes to diversify away their risks.
Hedge Funds typically invest in publicly traded securities, currencies, derivatives, etc. and present some interesting strategies. There is a long list of these strategies, with names like portable-alpha, absolute-return, 130-30, long-short, stat-arb, and so on. But these are lightly supervised investment vehicles. Managers are incentivized by participation in profits beyond some hurdle. Their expertise is in markets, modeling, trading.
Private Equity funds are more corporate finance/executives kind. They typically try to spot firms whose stocks may have fallen on harder times, or, more generally, whose market value (inclusive of takeover premiums) is way below the business value. They also buyout private companies when there is an opportunity such as cash crunch, business model change, death of a large holder, disputes, etc. They do buyouts, streamline the company, bring in better management, get rid of useless stuff, make it fit and attractive, and then resell to another buyer or re-IPO. They are ops/finance specialists, perhaps with some vertical-specific expertise.
Question: Sometimes Private equity firms sell one of their investments back on the exchange Where can I see this?
In other words where can you go to find a company that has recently come back to the exchange from a private equity firm or from becoming public?Answer: It would initially be listed as an IPO. You can check Yahoo Finance, stocks for the latest listings. If you have a specific company you want to know about check their web site.
Question: Can someone explain the difference between Venture Capitalism and Private Equity?
Answer: Venture capital is an investment meant to help get a promising company off the ground. Once the company has some track record of profitability and goes public, the vc’s make the bulk of their return, though they often chose to retain some ownership interest. VC is not angel investing, and does not usually provide seed capital. VC’s give the company cash to invest in itself, and the founders a bit of a payoff.
Private equity is an investment where an investment firm takes a public company private, where it is solely owned by the fund’s investors. Typically, the goal is to clean up the balance sheet or management, and take the company public again a few years down the line.
Question: What is the difference between a holdings company and a private equity firm?
I mean Blackstone buys over companies and they are considered a private equity firm. But Berkshire Hathaway also buys over companies but they are considered a holdings company.Answer: Very simply put, a holding company owns 51% or more in the equity of another company (called its subsidiary). Holding companies are usually in for the long haul, and can exist for decades (think Coca Cola). Private equity firms invest in non-public companies and typically hold their investments with the intent of realizing a return within 3 to 7 years. Generally, investments are realized through an initial public offering, sale, merger, or recapitalization. Private equity groups tend to focus on more mature businesses, often contributing both equity and debt (or some hybrid) to the transaction. The firms were commonly called leveraged buyout firms (LBO) in the 1980s.
Question: What is the specific differences between a Conglomerate and a Private Equity firm?
What are the specific steps I should take in converting the business model from Conglomerate to a Private Equity firm in terms of organizational structure and primary activities.Answer: Conglomerates focus on operational issues while Private Equity firms focus on investments. Move from performance management towards valuation to be able to make the shift in business model. Finance skills should dominate over Operational skills.
Question: If a company is purchased by a private equity firm what happens with the stocks?
Answer: In general when a publicly traded company is purchased, the terms for existing shareholders are included in the deal. This usually means that shareholders will be paid a set amount of cash or shares in a related company.
Question: How can a private equity fund introduce fresh capital in a Company it has acquired?
If a private equity fund acquires 100% stake in a company with a deffered payment of final 25%, how can it introduce more capital in the company? What could be the threat with the resulting action for the fund and the old owners?Answer: Private equity fund had acquired this as for investment and not controlling stake as owners. As such they are not entitled directly infuse fresh capital of there own however they can ask management to pass resolution for fresh capital and then invest over there.
-
Lessons Learned From Private Equity – Enhancing Performance
As private equity firms become more successful, many public firms are learning how to implement these companies’ winning strategies. According to McKinsey research, about 75% of private equity firms do not experience better success than the stock market. However, the remaining 25% of these firms consistently achieve results that outperform the stock market.
This high performing group has mastered several components to enhancing performance. For example, deals in the private sector that are worth over $100 million, did not evolve because private firms paid less then market value. Instead, these private equity firms are using calculated strategies to determine which companies to purchase.
Researching Deals
Public firms can enhance success during acquisitions by investing in a strategic assessment of potential deals. This assessment is typically taken during the first few months of a deal, and accomplishes several goals:
- Determining which costs to cut
- If there are new markets to pursue
- Potential portfolio changes
Once these components have been evaluated, a value creation plan can be implemented. In this plan, managers will determine the possible risks and value from acquisition activities.
Compensation Strategies
Private equity firms are highly committed to overseeing investments once the deal is closed. A method used to enhance performance is using compensation strategies to align high level managers with strategic objectives. This entices managers to invest more of their time in collaborating with the board and completing research to help set the direction of the company. According to McKinsey research, private equity partners using this strategy invested about 50% of their time three months after the deal closed. While, less successful private equity firms devoted only 15% of their time.
Successful partners also spent more time working with management to determine if staffing changes needed to be made after the deal closed. Active partners also used operation indicators to measure performance instead of standard financial measures.
Realigning Governing Structures
Although many companies use financial engineering or price arbitrage to measure performance, private equity firms are finding these tools to be less effective in current market conditions. The highest performing equity firms are adapting governance arbitrage, which involves realigning governing structures that are not aligned well.
Public Firm Challenges
Many public companies are focused on compliance instead of enhancing the effectiveness of governance. This is partially because of the growing number of regulations and codes that are evolving.
In addition, those who are not at the executive level do not always experience financial gains when the company is performing well. However, if the company experiences hardship, these individuals are affected. Since these individuals are often recruited from professional management positions, they are usually more emphatic with managers than shareholders.
Spending more time on strategy and developing talented managers can help board members have a better understanding of the company’s initiatives and objectives. Currently, most executives feel that the board has limited understanding of goals and corporate strategy.
Sharing Information
Public companies can implement strategies used by private equity firms such as creating a free flow of information between managers and non-executives. This includes sharing information that is not financial in nature – like strategies and initiatives. Although public companies do not have incentives, implementing these strategies can help boost performance.
External Benchmarking
There are also external benchmarks that can be used to determine performances initiatives. For example, these benchmarks may include overhead costs, cost per unit production, manufacturing processes and purchasing. Benchmarking these areas can give a company a competitive edge.
The benchmarking process should also provide independent verification that the benchmarks are being achieved. Companies also need to evaluate how often benchmarks are created. Since this process can be time consuming and expensive, companies can reevaluate these areas every few years.
Performance Challenges
Unlike pubic firms, private equity firms can offer managers equity stakes, investment opportunities, and bonuses for meeting objectives. In fact, top managers in equity firms own up to 19% of the equity. This creates personal motives for outperforming the competition.
When a private equity firm is having difficult times, management is quick to act swiftly – spending more time with management, minimizing underperforming areas, and hiring consultants to improve performance.
Because incentives are structured differently with public firms, the strategies and actions are often less aggressive. This is an area of opportunity for public companies. Taking aggressive steps to improve performance will ensure that actions are better linked to value creation objectives.
Searching for Talent
Finding a management group that is ready for extreme change can be challenging. If executives are not completely behind the changes, they will not be effective. These leaders must also have a high level of understanding of each team’s strengths and identify weak players.
Although public companies may face challenges, learning a few lessons from private equity firms can enhance performance. Revamping the governance structure will allow public firms to compete more effectively with leading private equity firms.
Resource:
Andreas Beroutsos, Andrew Freeman and Conor F. Kehoe. “What Public Companies Can Learn from Private Equity.” McKinsey on Finance, Winter 2007.Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy,” “Selling Your Business the Easy Way,” “Enhancing Your Business Value…The Climb to the Top,” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” Mark also has a monthly column in btobmagazine.com. For more information, visit http://www.vercoradvisor.com
Private Equity FAQ:
Question: Can you give me definitions of hedge funds, private equity funds and equity market?
Answer: Hedge Fund = mutual fund for rich people with very few limits set by the government.
private equity funds = a pool of money used to invest in non-public corporations or securities…often with the intention of running or reorganizing the companies after purchase.
equity market = the public exchange of ownership rights for legally recognized and structured businesses.
Question: What are the management fees for in Private Equity?
Answer: Management Fees are fees charged by a fund, partnership or other entity and will vary in percentage amounts and for different things, and thus are not equal or standardized as each entity is different and have various cost structures. All fees are required to be disclosed in the Private Placement Memorandum (PPM).
Question: To start a business, which is better private loans or investors?
To have an investors has a lot of benefits. They provide capital for the business to start in return for equity. But the problem is that shareholders can ruin the company or change the direction of the company and make it commercial. Shareholders can cause problems for the owner and loans are harder to get but you have full control of the company. To start a company, which better private loans with an interest rate or investors who takes shares of the company?Answer: I would have to go with investors on this one because if the company does not succeed then you will not have a debt to the government, if it does on the other hand all is well your investors get a cut if it weren’t for them the business would of never gotten off the ground. Take this and build a solid partnership over the long term and you are golden its all about who you know in this world. Karma is a real thing.
Question: How does private equity work, and how do you become a private equity investor?
I am 18 years old and I have an interest in the idea of becoming a private equity investor if I manage to accumulate enough starting capital. How does one go about becoming a private equity investor and becoming a multibillionaire like roman abramovich of millhouse capital, or prince alwaleed bin talal of the kingdom holding company? Please could somebody help explain.Answer: Private equity consists of investors and funds that make investments DIRECTLY into private companies, instead of trading through the stock market. Usually they include institutional investors (banks, hedge funds…) and rich individual investors. I think you might be interested in becoming a venture capitalist, which means you find starting businesses and invest money for a share of the business (a type of private equity investment). But before all this, you need the money, and this takes a lot of time and effort.
Otherwise, you could get an education (degree to start with) and get employed by a large financial institution (maybe even AlWaleed’s), become a senior analyst and make decisions in investing the institution’s private equity…maybe even a takeover!
Question: Will the private equity industry still be here in America in 20 years?
Will it still be as large as it was? I just wanted to know because I plan on getting into this industry after college.Answer: PE is one of the hardest areas of finance to get into. PE is surely here to stay for 20 years, and may be even longer! The reason being that PE firms rely primarily on the markets, both capital and debt markets, to source business. As both the aforementioned entities are in no hurry to disappear, it is a hard to imagine the non-existence of PE.
Question: What is the difference between Venture Capital and Private Equity?
Answer: Venture Capital is actually a type of Private Equity.
Private Equity means shares that are not traded openly in the public. Venture Capital is given to start-ups or entrepreneurs as an exchange for some % of share in the new company.
Question: Who can I hire to sell my private equity placement with out violating reg D laws?
I’d like to know how hard money lenders use the private placement offering. I understand you can raise money but I am unsure if they are hiring brokerage firms and if they are, who are they?Answer: Generally they hire an investment banking firm and a law firm. It is very expensive. If you have to ask, you can’t afford it. You would have to be talking about a placement of millions of dollars in equity to make it worthwhile to properly prepare the paperwork for a private placement.
Question: What is Private Equity?
And is it hard to get a career in it because I heard people who work in it make boatloads of money?Answer: You could become either a broker, trader, analyst, etc. If you are fiercely competitive and sharp you could make plenty.
-
Do You Know What the Difference is Between Venture Capital, Private Equity, and Debt Capital?
Have you ever heard the terms “venture capital” or “private equity?” Well, if you are starting a business, you will need to know what kinds of investors you need to contact and the difference between venture capital, private equity, debt capital, and how investors are categorized. You will also need to know about what conditions different forms of capital is distributed to aspiring entrepreneurs.
Debt Capital
What is debt capital? Well, you can think of debt financing as a loan from a bank that you have to pay back with interest. In reality, that’s exactly what debt capital is. Many entrepreneurs often resort to getting some debt financing to start their business. Debt capital, depending on its size, can be obtained from your regular bank or if it is a large sum of money, you might have to go to a special bank known as an investment bank. As far as the investor who is giving you the debt capital is concerned, debt financing is a much lower risk investment compared to equity capital. This is because debt capital is funding that is lent to you, just like as if you are taking a loan out for a car or a mortgage on your home.
What is the interest rate on debt capital? In most cases, when in investor who invests debt capital to a budding company, he expects to make at least ten percent off of the sum that was invested into a given company. Furthermore, debt financing is usually given to those entrepreneurs, who the investor believes is most likely believes will pay the debt off in due time.
Equity Capital
Equity capital, on the other hand, is different because unlike debt capital; you do not need to pay anything back to the investor. Equity capital is funding that practically every company gains as its business grows. Equity is usually invested out of a particular fund and is classified as either private equity and venture capital.
Private Equity and Venture Capital
Basically, private equity is an equity fund that belongs to either privately owned institutions or private individuals. Usually private equity is invested by institutional investors, who are people that specialize in investing private equity from such institutions. Institutional investors usually work for a private equity or PE firm that manages private equity. Venture capital is also private equity but is managed slightly differently than private equity. Venture capital is actually private equity that is usually reserved for investments to companies that have the potential for high growth.
For those of you who need financing and do not want to have to worry about debts, you would like to have some kind of equity capital, be it private equity or venture capital. This funding is much better than debt capital, because unlike debt capital, you do not have to pay the investors back. Instead, with equity funding, an investor makes money when a company cashes out. This usually means that when a company is bought by another company or is prepared for public offering, that is when equity firms make their money. The other side of the coin, however, equity capital is a much more risky investment for the investor than debt financing, because with equity capital, an investor makes money only with a buyout, initiate public offering or IPO, or an exit strategy.
Investors
As mentioned before, there are different investors and investing institutions. Some investors are wealthy individuals who invest their own money to entrepreneurs whom they like, whereas others work for institutions, such as private equity or venture capital firms and invest money from their institutional funds.
Angel Investors
Angel investors are wealthy private individuals who invest their money into a given entrepreneur for whatever reason. Some angel investors invest in a particular company because they might like that particular entrepreneur or feels charitable and wants to share their own entrepreneurial experience with other budding entrepreneurs to get on their feet. Other angels might invest in a company because a particular company might fit into that angel investor’s values, ethics, or other personal interests. If you have a wealthy relative and he invests in your company simply because he wants to help out a member in his family, he is also an angel investor.
Venture Capitalists and Institutional Investors
Unlike angel investors, venture capitalists and institutional investors do not invest their own money. Institutional investors usually work for a private equity firm and invest equity from funds that are usually parts of a pension fund or other types of funds. Venture capitalists are investors who solely invest in venture capital and work for venture capital firms.
Where Does the Money Come From?
Well, that is a good question. In the case with most successful private equity and venture capital firms, the money for investments comes from venture funds that these firms have raised. When a venture capital or private equity firm is successful with their investments, they are able to raise new funds for future investments. Again, as mentioned before, equity investors cash in on their investments when a company is liquidated by either being bought out from another company, etc.
How Do You Contact Investors?
There are many ways you can contact investors, but any way you look at it, the task involves a lot of finger walking. There are directories available that can help you find investors easily. One of these databases is the VCgate Venture Capital Database, which can be found at http://www.vcgate.com.
Ivan Faucon writes about venture capital and entrepreneurs. He will also occasionally write about other business topics, such as consumer goods, jewelry, and internet marketing.
Venture Capital FAQ:Question: Where do you find venture capital for a business idea?
Answer: An attorney or business associate can be a good place to get a VC referral. You also can network among business executives in the field of your business. One thing to do is don’t try to get a referral to just any VC. You want one that is interested in your particular type of business. VC’s websites can be helpful at indicating their investment focus (and can show you if they already invested in a competitive venture) but they are often very broad when in reality they favor certain sectors that change over time with the business climate. Again, networking with executives that have received funding or pitched to a particular VC is the best way to gather insight if you don’t know any VCs to ask directly.
The National Venture Capital Association has a lot of information including a listing of members. Also, Entrepreneur magazine published a top 100 VC list. But remember, target those that are focused on your business segment.
Question: Does a person have to have good credit to obtain venture capital?
Or does it happen that the investor thinks the idea is a smoken one and invest on that account?Answer: Your personal credit is not a factor in getting venture capital. But, it is more than just the “idea” that gets them to invest. They are looking for the combination of a compelling product/technology and the technical and managerial talent to make it a reality. It is often more about the team and their ability to build a business around either a new technology, product(s) or a powerful business model that it is a specific idea.
Its important to understand that VCs primarily invest in great management teams and/or exceptional technologists. Generally, you need to have either several years of senior corporate experience in the right area for your venture or be a technical expert in the field of your products/business model. If one doesn’t have the background themselves, they need to recruit it into their team. Getting VC financing is very difficult in any environment but is particularly tough in the current economy.
Question: What is venture capital funding? Where does the money come from?
Answer: Venture capital funding is providing money to newly-formed companies that have not yet become successful. Venture capital investments are very risky because a large proportion of new businesses are unsuccessful. However, if the business does become successful, the venture capitalists will make a great deal of money because they came in at the beginning and generally purchased a substantial proportion of the new company.
Where does the money come from? Most of the money comes from wealthy investors, large pension funds and hedge funds. They hire people to look for promising start-up companies, and provide them with the initial capital to get them started.
Question: How could you get capital from an angel or VC? What would you say to these investors to attract them to your venture?
I want to secure $1 million to pay for an expansion of my online business. Is a bank loan possible?Answer: Possible but unusual. Banks have preferred to loan on “bricks and mortar” companies. You would pay 7% interest if you could get the loan. Payments of $6,500 a month. Every business owner in the world is sure that his “expanded business will be able to make enough to cover this new loan”…. because businessmen are optimists but also because they wanted the loan for a reason in the first place.
Venture Capitalists can be found in the Wall Street Journal. The problem is that they want 51% ownership of the company. And they want the right to fire you even though you used to own and run the company by yourself.
Angel investors are looking for good causes. Probably not your online business unless you could prove that you would be hiring hundreds of local people.Question: Where can I find investors or venture capital firms to invest in my social networking website?
Answer: If you’ve got the goods, research the vc firms to find those that invest in your product/business area. Then, network to get a referral if possible. It is much better to get a referral than mailing your plan in. VCs get hundreds of business plans & pitches and it is very hard to standout if you mail it in. Make sure you are really prepared with a well-thought presentation and be prepared to answer questions about your market and competition.
Question: If you ask a venture capitalist to finance your business, do you still have to pay back the money they loaned you? I’m assuming yes but just want to make sure.
Answer: VCs don’t generally lend, they buy partial ownership (also called equity or stock). However, it is not that simple. They get Preferred shares that have a liquidation preference. So, when the company is liquidated (sold or goes public), their investment gets paid back “off the top” in addition to getting their prorata share of the proceeds. In some situations after they are an investor, they will lend money to the company in what is called a “bridge loan”. These loans always include stock warrants. But, they only do this for existing investments.
Question: Why do the share prices of VCT’s seem to fluctuate less than other shares?
Many of the Venture Capital Trusts have share prices which don’t seem to move at all some days. I want to know why that is. Why don’t VCT share prices move around like other shares?Answer: Most “VCT”s are typically very, very low volume, their prices tend not to be as volatile as stocks in the short-term. People buy them to hold, not to trade.
Question: Are there any restrictions on foreign investments in the U.S.?
I am a start-up corporation seeking venture capital funds. I have had inquiries from foreign investors. Can I accept their money?Answer: Yes you can accept their money. And the IRS has nothing to do with it, they are tax collectors not foreign investment blockers. You will need to consult with a lawyer regarding the legalities though and the lawyer will recommend any changes in your corp structure that might be more beneficial or necessary in this case. You might end up forming a holding company incorporated in a state like Nevada which handles the incoming funds from your investors and then issues bonds to your current company. It will be a little complicated so buy some time with an accountant and an attorney who has a history in this niche.