One of the cornerstones of the alternatives investing ecosystem alongside hedge funds, private equity (PE) has evolved rapidly over the last five decades, becoming a multi-trillion-dollar asset class today.
Typically structured as illiquid pools of capital with a lock-in period of several years, private equity funds invest in unlisted companies with a view to generating a high rate of return.
Private equity’s core value proposition has been, and remains, its ability to leverage financial engineering and operational expertise – in terms of in-depth domain understanding and proven track record of turning around struggling companies – to steer business growth.
Primarily catering to accredited institutional investors such as insurers and pension plans, high net worth individuals and family offices, PE generally operates with a fixed investment horizon before liquidating its portfolio via asset sales to either peers or strategic suitors.
This segment involves stakes in PE funds getting sold or undergoing ownership change, in order to enable existing LPs to raise liquidity. Another facet of the PE secondaries market is the so-called “direct” or “synthetic” secondaries transactions wherein private equity investors divest equity stakes in private companies.
Secondaries serve an important function in the context of PE, an illiquid asset class, by helping institutional investors actively manage and strategically realign their portfolios, in line with their evolving risk profiles, and return expectations and horizons.
This segment has witnessed rapid growth over the past decade, thanks significantly to so-called intermediaries such as secondary advisory firms who back and co-ordinate deals.
Buyouts are the quintessential private equity play, wherein a mature, typically listed company goes private. This approach allows PE firms to execute their investing playbook freely and without the constraints of being minority investors who lack control to reshape investee companies.
While leveraged buyouts involve PE firms financing the takeover with gearing or borrowed money – as a multiple of the equity they commit from their funds – management buyouts entail the current management team acquiring the company’s assets and taking a controlling stake.
Once a VC-backed company matures, establishes a credible business model, and starts expanding rapidly, it requires additional financing to sustain the growth momentum. That’s where growth equity comes into play, with PE firms normally getting a minority stake for providing such funding.
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