What is Private Equity?
Private Equity is a closed, unregulated industry, which until recently has been virtually unnoticed by the public. Unlike stocks, mutual funds, and bonds, private equity funds usually invest in more illiquid assets, i.e. companies. As the name implies, private equity funds invest in assets that either; not owned publicly or that are publicly owned but the private equity buyer plans to take it private. The money used to fund these investments comes from private markets.
The private equity sector has grown substantially over the past decade. From the perspective of an investor, they operate under the principle: the more risk the more potential reward. From the side of the company owner, the more risk you ask an investor to assume the more potential return and more control the investor will demand. Usually, private equity firms (i.e., Blackstone, Carlyle Group, Bain Capital) structure equity investments in stable mature companies that range in size, with some as small as a couple million dollars to others in the billions. This is a type of investment aimed at gaining significant, or even complete, control of a company in the hopes of earning a high return.
Therefore, the basic objective has remained constant: a group of investors buy out a company and use that company’s earnings to pay themselves back. What has changed are the sheer numbers of private equity deals. In the past ten years, the record for the most expensive buyout has been broken and re-broken several times. Private equity firms have been acquiring companies left and right, paying sometimes shockingly high premiums over these companies’ market values. As a result, takeover targets are demanding excessive prices for their outstanding shares; with the massive buyouts that have made headlines around the world, companies now expect a certain payment over their current value.
These high-priced deals have occurred exponentially in recent years and they have led some to question whether this pace is sustainable in the long run? Two of the driving factors behind this growth are taxation and regulation; growth comes from a largely unregulated environment (Pre-Volcker) and through executives dodging taxes. Essentially, private equity owners are evading taxes on both profits received from performance fees, from their investors and by taking dividends from indebted companies. The central piece of the problem is “carriedinterest,” which allows private equity owners to reward managers and gain huge profits.
Below is a list of Private Equity firms that currently reside within investment banking firms or have previously completed a spinout from an investment bank.
|10 Largest Global Private Equity Firms||Size||Parent Bank||Size|
|TPG Capital||$ 50.55B|
|Goldman Sachs Principal Investment Area||$ 47.22B||Goldman Sachs||$923B|
|The Carlyle Group||$ 40.54B|
|Kohlberg Kravis Roberts||$ 40.21B||Bear Stearns||Bought/Bailed Out|
|The Blackstone Group||$ 36.42B||Lehman Brothers||Bought/Bailed Out|
|Apollo Global Management||$ 33.81B|
|Bain Capital||$ 29.4B|
|CVC Capital Partners||$ 25.07B||Citigroup||$1.183T|
|Hellman & Friedman||$ 17.20B|
|First Reserve Corporation||$ 19.06B|
Private equity funds under management totaled $2.4 trillion at the end of 2010. Nearly $180B of private equity was invested globally in 2010, up 62% from the previous year but still down 55% in the peak in 2007. It continued to increase in 2011, to reach an all-time quarterly record of $120B in Q2. Only until regulations and taxes are implemented firms will continue to take huge risks with backing of Big Banks to gain massive rewards. Finally, without the enforcement of Dodd-Frank in particular, The Volcker Rule; private equity will remain an industry without any checks and balances.
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