Investors provide private equity capital, to selected
enterprises not quoted on a stock market, in the hopes
of achieving risk adjusted returns that exceed those
possible in the public equity markets. Most institutional
investors do not invest directly in privately held
companies, lacking the expertise and resources necessary
to structure and monitor the investment. Instead,
they invest indirectly through private equity funds
that count with professional teams able to maximize
the value of their investors.
Private equity funds generally have a limited investment
period of time, usually between three and five years
and receive a return on their investments through
one of the following ways:
an
Initial Public Offering (IPO) – the
shares of the company are offered to the public,
typically providing an immediate realization to
the financial sponsor as well as a public market
into which it can later sell additional shares;
trade
sale to an strategic buyer - the company
is sold for either cash or shares to an strategic
investor;
secondary
BuyOut - the company is sold for either
cash or shares to another private equity fund;
a
Recapitalization - cash is distributed
to the shareholders (in this case the financial
sponsor) and its private equity funds either from
cash flow generated by the company or through raising
debt or other securities to fund the distribution.
Private equity invests in
growth companies at all stages of their development.
These stages can be recognised as Early Stage, which
encompasses Seed and Start-up stage companies; Venture
Capital, which encompasses Early Stage and Expansion
stage companies; and Buyouts, also recognised as later
stage companies.
