Private equity is a financial activity of an investor to enter the capital of companies that need equity. The term capital relates generally invest in unlisted (hence its name unlisted capital or private equity as opposed to the term public) companies.
Companies that provide a portfolio of investments in performing operations are holding companies or investment funds. Their stake may be unilateral or cross.
The capital comes in many forms:
the venture capital to fund start-ups .
the capital or LBO transmission to accompany the transmission or sale of the company .
the capital to help the recovery of a company in trouble.
Terms and stakeholders
Operations capital investment takes place :
by purchase of existing shares from existing shareholders
either by providing additional funds to the company in the form of subscription of new shares issued by it (capital increase) .
They are made by:
companies or investment funds
wealthy and experienced individuals (venture capitalists or angel investors).
These operations often use leverage, focusing on debt financing (bank loan).
Objectives, description and typology
Venture capitalists aim to achieve by the transfer or sale of their part in the longer term (3 to 10 years depending on economic sectors) capital gains. This output can be either OTC or through IPO.
Concept of private equity (unlisted)
The term refers to private equity securities of companies (including stock for corporations, or shares in partnerships) that are not traded on a market, as opposed to public equity, which refers to securities which are listed on a public market.
Regulatory obligations, liquidity and guarantees of private equity are lower because of the greater difficulty in selling them over the counter. To compensate for this, the capital investment seeks long-term performance superior to those of financial markets.
The operation of private equity is quite simple: it is to buy a business, then sell it a few years later. The problem therefore lies in :
the choice of the company. Many constraints are required (stable company, established with a strong cash generation)
the assessment of the adequacy and of the appropriate debt structure (there are indeed many) purchase amount. This involves modeling (LBO Model).
Some specialized funds only invest in real estate. These real estate assets can be dorm rooms, hotel complexes, office buildings and shopping centers. The major difference with the private equity is the classic characteristics of the real estate sector is extremely cyclical.