Private Equity Overview (1)

Private equity fund managers have four principal roles:
1. Raise funds from investors. These funds are used to make investments, principally
in businesses which are, or will become, private companies.(Beginning stage)
2. Source investment opportunities and make investments.
3. Actively manage investments.
4. Realise capital gains by selling or floating investments.

Fund raising:
Funds are raised from international investors, many of which are pension funds,
banks, insurance companies and high net worth individuals. These investors will generally
invest via a limited partnership, as will the private equity fund managers themselves.

Sourcing investments:
A private equity fund must source and complete successful
transactions to raise further funds. A significant amount of effort and resource is invested in
prospecting for transactions and relationship management with individuals who may give
access to deals. These include investment bankers, accountants and other advisers and senior
figures in industry. Increasingly, investment teams are focusing on particular sectors of the
economy. This contrasts with early buy-out experience where investors were usually financial
experts rather than sector specialists.

Realizing capital gains:
The industry generally talks of a 3to 5years exit horizon, meaning that the investment will be made with the explicit assumption that it will be sold or floated within that time frame. The academic evidence suggests that there is a wide variation in the length of time any investment is held. There is no evidence that the industry systematically seeks to ‘flip’ investments in a short time period.

In a buy-out, a new company (‘Newco’) is established that raises funds to acquire the target
company.

 
(Source: ICAEW publication)




http://www.bain.com/bainweb/PDFs/Bain_and_Company_Global_Private_Equity_Report_2015.pdf