Value of Private Equity

Private equity investments pertains to the use and allocation of funds and assets for investing directly into private businesses or carrying buyouts of public companies which leads to acquired public companies being delisting as public bodies. Primarily speaking, private equity investments are directed towards the fulfilment of various objectives such as funding new and latest technological ventures, strengthening a balance sheet, expanding working capital and carrying out acquisitions.    

Private equity funds are now believed to be one of the most valued and appreciated categories of assets since the emergence of private equity investments. Overtime, private equity firms have shown immense growth and have claimed and accumulated considerable amount of sums, meeting large acquisition targets. According to collected data and stats, it is estimated that the value of private equity investments on a global level increased from $28 billion in 2000 to $502 billion in 2006. The fact that the significant growth was observed despite the increasing challenges and competition and placement of more stringent monitory policies by the government speaks of how highly private equity is valued by the investors.

Private equity is today seen as a means to gain high returns by majority of the investors, an attribute that is mostly claimed to be a result of increased liberty, placement of effective and highly motivational incentives, development of a focused approach to improve cash flow and adoption of a pro-active approach and attitude towards the use of debt.

Private equity strategies are usually based on a buy-to-sell approach, which is also deemed to generate scalable results if adopt by public companies for business acquisitions. Private equity firms employ the buy-to-sell approach in order to gain immediate and swift control over an acquired business. It is particularly focused on value creation in order to maximize profit generation out of selling an acquired business. This buy-to-sell strategy is mostly implemented by private equity firms when these concern themselves with the acquisition of businesses that may be underperforming.

Since its advent, the field of private equity has grown to get widespread acknowledgement and appreciation and private equity investments and funding have penetrated American markets as well. In fact, latest developments indicate towards a significant increase in private equity investments in America and the private equity firms in the region are expected to come at par with the European private equity firms in the near future.

It is suspected that the last credit-crunch has hit some of the major European private equity firms quite hard. With crippling funds, most of these firms were not able to negotiate effectively on debts and had to work according to creditors’ terms. Consequently, in the wake of latest developments, it may not be wrong to deduce that European private firms do not outperform their American counterparts any more as implied by the data IRR data collected for the year 2007, which states that the median net IRR for European firms amounted to -10.4% and for the American firms it amounted to -3.4%.

The changing trends and developments in private equity arena have given rise to new practices. Today, instead of focusing on the acquisition of specific business units of public companies, private equity firms are more inclined towards buying the entire public company. However, it is suggested that in the backdrop of continually increasing interest rates, it may become harder for private equity firms to carry out large buyouts. But despite the stated challenges, it is believed that the buy-to-sell strategy of the private equity firms is to render fruitful results in the longer run.                 

 

 

Tariq Linjawi

Founder/Partner

UCG