Private Equity

Private Equity ( German off-exchange equity) is a form of equity capital, in which the commitment by the investor participation is not traded on regulated markets (stock exchanges). The investor can be private or institutional investors; it's often on this participation form specialized venture capital firms.

If the capital is young, innovative companies provided, by their nature, involve a high risk, but also appropriate growth opportunities in itself, we speak of risk capital or venture capital (English venture capital ).

The language constructs Private equity firm (PEG ) and venture capital firm ( VCG ) are now on the terms venture capital company and venture finance company frequently used.

Venture Capital

In this form of private equity capital is often also the so-called risk capital ( or venture capital) is spoken. Participation is distinguished among others, thereby by the following of:

• It is yet to be established or newly founded young company.
• It is primarily industries whose life cycle is still in an early stage.
• The income from such participation are at the time of recording the participation not yet foreseeable. More than that they are associated with a relatively high risk that can lead to the total loss of the invested capital. But this grows regularly with a success well above average returns.
• The VCG is not only capital available, but also management know -how to help the generally inexperienced entrepreneurs, but also to make the participation from the perspective of VCG successful. For this reason, this often spoken of intelligent capital.

Your authorization owe the venture capital firms primarily to the fact that the company founder in the establishment phase the necessary financing agents often can not apply through their private assets. Credit institutions given to young companies due to lack of security position is usually no loans. Therefore, this form of raising capital offers an alternative to traditional forms of financing.

Private Equity

Just as the venture capital companies ( VCG ) and the private equity firms (PEG ) collect funds from institutional investors such as banks or insurance companies, in some cases, directly from high net worth individuals.

The investment strategy

The PEG looking specifically from companies whose return / risk ratio is favorable. Characterizes this situation on the one hand by the fact that the ideal target company (Target ) has high and stable cash flows. In addition, it should have barriers to entry for potential competitors. Regarding its capital requirements for the current fiscal no major claims (eg for new investments or research and development).

PE transactions are repeatedly taken the form of a leveraged buy-out (LBO ). We are to understand that the participation by a high proportion of debt is realized. Even if the respective PEG has collected financial capital, it is widely use debt for a stake. Here is an example:

Private Equity through leveraged buy-out

The expectation of the purchaser in the LBO is based on the so-called leverage effect. Due to the low use of own resources can be high - achieving equity, as long as the return on assets is higher than the interest on borrowed capital - attractive for the PEG. Requirement is that the target company is a sufficiently high free cash flow generated by which the liabilities are settled.

Investors in private equity funds

For investing in PEG banks, insurance companies, pension funds, wealthy private individuals or private American universities private equity funds are an opportunity to operate in the capital market without being taken financially liable in the failure case of individual investments due to the mostly confusing contract and participation structures. Would the investors to invest directly in the target, they would just stand financially due to their social responsibility and the protection of its commercial reputation. The investors receive at the PEGs anonymity and thus protect against a financial liability. This is paid for with substantial fees for fund management as well as above-average profit sharing payable to the fund initiators.

Management buy-out

In the context of so-called management buy- outs (MBO) established businesses or parts taken from them by the existing management. Since the individual managers typically are not in a position to pay the purchase price, they turn to private equity companies. These participate after above-mentioned model in the company. As a result, so that PEG and management jointly involved in the company, with the management generally enjoys favorable conditions and thus can quickly generate a capital gain in the rule than the PEG.

Private - equity firms

While private equity firms, which are referred to in the jargon as financial sponsors, active in the Anglo- American market for over 20 years, these financial investors are also rising sharply in recent years, active in Europe.

Industrial companies and insurance companies are increasingly active in this area. Since many established companies are open only to institutional investors or high net worth individuals, also a fund - segment for small investors is emerging in recent years. Most of these so-called retail funds are designed as closed-end funds investing through a fund of funds concept again in large private equity funds, which however leads to a double cost structure.

Economic importance / Statistics

The global ratio of private - equity firms to corporate acquisitions even in 2000 was 3 percent. In 2004 he had risen to 14 per cent and had reached a volume of 294 billion dollars. In order to make purchases of very large corporations, the private - equity firms form part of contractors.

As a result of the financial crisis in late 2008 has broken all along the line the business of private equity companies. In 2009, the volume of announced transactions in Germany only 1.1 billion euros - a decline of more than 80 percent compared to the previous year.

The volume of worldwide announced deals was in April 2009, only $ 9 billion, while it had two years earlier, located to the wedding of the private equity boom, yet at approximately $ 120 billion.

The locusts debate

In Germany private equity has come as a form of equity financing in the public criticism. The discussion in mid-2005 was initiated here by Franz Müntefering, who hired a comparison with " swarms of locusts "; Here, the term " locusts" is generally accepted as metaphor. Background of the utterance was taking place at that time acquisition of Grohe from Hemer.

Regulation by the EU

In response to the financial market crisis, the European Commission in December 2010, the AIFM Directive (AIFM = Alternative Investment Funds Managers) has been adopted. The aim of this Directive is, among other things, the regulation of private equity funds and hedge funds. The Directive is to be implemented by 2013 in all European Member States into national law.

Venture Capital and Private Equity