Private Equity

Private Equity Analysis

Group 4

Fan Zhuo

Santosh Vummidi Singh

Shan Liu

Yao Yu

Zhengyi Jiao

The Characteristics of Private Equity Investment (Written by Yao Yu)

Private equity is defined as “privately negotiated transactions in public or private companies” (Private Equity Primer, 1). According to the definition, apparently most of the transactions in private equity investment are not public available. However, lacking of public information does not mean that the means of investing private equity are so different from investing other equity markets which are public available.

Generally speaking, three major investment behaviors commonly happen in private equity markets—venture capital, buyout and distressed debt. Owing to different natures among start-up companies, expanding companies and mature companies, the sources of funding for them also vary correspondingly.

For start-up companies, venture capital (VC) is the crucial strategy to generate funds. After all, start-up companies are too immature to be financed by issuing public debt or stock offerings (Private Equity Primer, 1). As such, the only funding sources are from VC for start-up companies and the investors of VC are mostly from “institutional investors and high net worth individuals” (Wiki, 2010). The main advantage for investing VC is that the return can be enormous, since most of VC investors would invest high-tech companies which are growing very fast in their early stages.

For mature companies, buyout is the major means to finance their businesses. A buyout is often “referred to as a ‘leveraged buyout’ or ‘LBO” (Private Equity Primer, 2). Accordingly, buyouts are involved with debts which are typically “bank debt and/or high-yield bond” which often are “either below investment grade or unrated” (Private Equity Primer, 2). Clearly, the risks of investing in LBO firms can be very high due to the high degree of leverage positions by using low rating debts....