Although the capital for private equity originally came from individual investors or corporations, in the s, private equity became an asset class in which various institutional investors allocated capital in the hopes of achieving risk adjusted returns that exceed those possible in the public equity markets. In the s, insurers were major private equity investors. Later, public pension funds and university and other endowments became more significant sources of capital.
US, Canadian and European public and private pension schemes have invested in the asset class since the early s to diversify away from their core holdings public equity and fixed income. Most institutional investors do not invest directly in privately held companies , lacking the expertise and resources necessary to structure and monitor the investment.
Instead, institutional investors will invest indirectly through a private equity fund. Certain institutional investors have the scale necessary to develop a diversified portfolio of private equity funds themselves, while others will invest through a fund of funds to allow a portfolio more diversified than one a single investor could construct.
Returns on private equity investments are created through one or a combination of three factors that include: debt repayment or cash accumulation through cash flows from operations, operational improvements that increase earnings over the life of the investment and multiple expansion, selling the business for a higher price than was originally paid. A key component of private equity as an asset class for institutional investors is that investments are typically realized after some period of time, which will vary depending on the investment strategy.
Private equity investments are typically realized through one of the following avenues:. Large institutional asset owners such as pension funds with typically long-dated liabilities , insurance companies, sovereign wealth and national reserve funds have a generally low likelihood of facing liquidity shocks in the medium term, and thus can afford the required long holding periods characteristic of private equity investment. The median horizon for a LBO transaction is 8 years.
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The private equity secondary market also often called private equity secondaries refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors.
For the vast majority of private equity investments, there is no listed public market; however, there is a robust and maturing secondary market available for sellers of private equity assets. Increasingly, secondaries are considered a distinct asset class with a cash flow profile that is not correlated with other private equity investments. As a result, investors are allocating capital to secondary investments to diversify their private equity programs. Driven by strong demand for private equity exposure, a significant amount of capital has been committed to secondary investments from investors looking to increase and diversify their private equity exposure.
Investors seeking access to private equity have been restricted to investments with structural impediments such as long lock-up periods, lack of transparency, unlimited leverage, concentrated holdings of illiquid securities and high investment minimums. According to an updated ranking created by industry magazine Private Equity International  published by PEI Media called the PEI , the largest private equity firm in the world today is The Blackstone Group based on the amount of private equity direct-investment capital raised over a five-year window.
The 10 most prominent private equity firms in the world are:. Because private equity firms are continuously in the process of raising, investing and distributing their private equity funds , capital raised can often be the easiest to measure. Other metrics can include the total value of companies purchased by a firm or an estimate of the size of a firm's active portfolio plus capital available for new investments. As with any list that focuses on size, the list does not provide any indication as to relative investment performance of these funds or managers.
Additionally, Preqin formerly known as Private Equity Intelligence , an independent data provider, ranks the 25 largest private equity investment managers. Invest Europe publishes a yearbook which analyses industry trends derived from data disclosed by over 1, European private equity funds. The investment strategies of private equity firms differ to those of hedge funds. Typically, private equity investment groups are geared towards long-hold, multiple-year investment strategies in illiquid assets whole companies, large-scale real estate projects, or other tangibles not easily converted to cash where they have more control and influence over operations or asset management to influence their long-term returns.
Hedge funds usually focus on short or medium term liquid securities which are more quickly convertible to cash, and they do not have direct control over the business or asset in which they are investing. Private equity specialization is usually in specific industry sector asset management while hedge fund specialization is in industry sector risk capital management. Private equity strategies can include wholesale purchase of a privately held company or set of assets, mezzanine financing for start-up projects, growth capital investments in existing businesses or leveraged buyout of a publicly held asset converting it to private control.
Private equity fundraising refers to the action of private equity firms seeking capital from investors for their funds. Typically an investor will invest in a specific fund managed by a firm, becoming a limited partner in the fund, rather than an investor in the firm itself. As a result, an investor will only benefit from investments made by a firm where the investment is made from the specific fund in which it has invested. As fundraising has grown over the past few years, so too has the number of investors in the average fund. In there were 26 investors in the average private equity fund, this figure has now grown to 42 according to Preqin ltd.
Often private equity fund managers will employ the services of external fundraising teams known as placement agents in order to raise capital for their vehicles. The amount of time that a private equity firm spends raising capital varies depending on the level of interest among investors, which is defined by current market conditions and also the track record of previous funds raised by the firm in question.
Firms can spend as little as one or two months raising capital when they are able to reach the target that they set for their funds relatively easily, often through gaining commitments from existing investors in their previous funds, or where strong past performance leads to strong levels of investor interest. Other managers may find fundraising taking considerably longer, with managers of less popular fund types such as US and European venture fund managers in the current climate finding the fundraising process more tough.
It is not unheard of for funds to spend as long as two years on the road seeking capital, although the majority of fund managers will complete fundraising within nine months to fifteen months. Once a fund has reached its fundraising target, it will have a final close. After this point it is not normally possible for new investors to invest in the fund, unless they were to purchase an interest in the fund on the secondary market.
The state of the industry around the end of was as follows. Following on from a strong start, deal activity slowed in the second half of due to concerns over the global economy and sovereign debt crisis in Europe. This was down a quarter on the same period in the previous year. Private-equity backed buyouts generated some 6. This was down on 7. The average time for funds to achieve a final close fell to Public pensions are a major source of capital for private equity funds. Increasingly, sovereign wealth funds are growing as an investor class for private equity.
Due to limited disclosure, studying the returns to private equity is relatively difficult. Unlike mutual funds, private equity funds need not disclose performance data. And, as they invest in private companies, it is difficult to examine the underlying investments. It is challenging to compare private equity performance to public equity performance, in particular because private equity fund investments are drawn and returned over time as investments are made and subsequently realized.
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This analysis may actually overstate the returns because it relies on voluntarily reported data and hence suffers from survivorship bias i. One should also note that these returns are not risk-adjusted. A more recent paper Harris, Jenkinson and Kaplan,  found that average buyout fund returns in the U. These findings were supported by earlier work, using a different data set Robinson and Sensoy, Commentators have argued that a standard methodology is needed to present an accurate picture of performance, to make individual private equity funds comparable and so the asset class as a whole can be matched against public markets and other types of investment.
It is also claimed that PE fund managers manipulate data to present themselves as strong performers, which makes it even more essential to standardize the industry. Two other findings in Kaplan and Schoar : First, there is considerable variation in performance across PE funds. Second, unlike the mutual fund industry, there appears to be performance persistence in PE funds.
That is, PE funds that perform well over one period, tend to also perform well the next period. Specifically, FOIA has required certain public agencies to disclose private equity performance data directly on their websites. In the United Kingdom, the second largest market for private equity, more data has become available since the publication of the David Walker Guidelines for Disclosure and Transparency in Private Equity.
There is a debate around the distinction between private equity and foreign direct investment FDI , and whether to treat them separately. The difference is blurred on account of private equity not entering the country through the stock market. Private equity generally flows to unlisted firms and to firms where the percentage of shares is smaller than the promoter- or investor-held shares also known as free-floating shares. The main point of contention is that FDI is used solely for production, whereas in the case of private equity the investor can reclaim their money after a revaluation period and make investments in other financial assets.
At present, most countries report private equity as a part of FDI. Private equity decision-making has been shown to suffer from cognitive biases such as illusion of control and overconfidence. From Wikipedia, the free encyclopedia. This article may be too technical for most readers to understand. Please help improve it to make it understandable to non-experts , without removing the technical details. December Learn how and when to remove this template message.
Main article: Leveraged buyout. Main article: Growth capital. Main article: Mezzanine capital. Main article: Venture capital. Main article: Distressed securities.
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Main article: Private equity secondary market. Main article: History of private equity and venture capital. Main articles: History of private equity and venture capital and Early history of private equity. Main articles: History of private equity and venture capital and Private equity in the s. Main articles: History of private equity and venture capital and Private equity in the 21st century.
Main articles: Private equity firm and List of private equity firms. Main article: Private equity fund.
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This section needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Retrieved 18 May Columbia Business Law Review 1 : Private Equity at Work, Journal of Applied Corporate Finance. Retrieved 5 January Who runs Britain?
Bureau van Dijk. Retrieved 22 May Private Equity Council. Secrets in the Pipeline. The handbook of financing growth: strategies and capital structure. Archived from the original on 20 January Retrieved 15 October Something Ventured, Something Gained.
A review of angel investing research: analysis of data and returns in the US and abroad
Harvard Business School, 24 July Graduate School of Business University of Chicago. National Venture Capital Association. Private Equity International, Archived from the original on 14 February The Pink Sheet Daily. Bartlett, "What Is Venture Capital? Archived from the original on 28 February Cartwright, General Counsel U. Securities and Exchange Commission. Press The History Of Leveraged Buyouts. The authors are the first to examine the angel investing literature in a comprehensive fashion, comparing between various returns found across all major studies of the subject done to date.
McDonald, M. Emerald Group Publishing Limited. Please share your general feedback. You can start or join in a discussion here. Visit emeraldpublishing. Abstract Purpose The purpose of this paper is to examine the literature on angel investors. Findings Most researchers do not explicitly report if their estimates are equal-weighted or value-weighted, nor do they say whether the results are weighted by the duration of the investment. Practical implications Limitations on the comparability between various studies of angel investing returns leave the current literature incomplete.
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