In the following, I will point out the different business models, strategies and opportunities for private individuals to invest in the industry. The methods and analysis that are used in this paper are aimed to explain traded private equity to private individuals.
In recent years, the term „private equity“ has become increasingly important in the financial industry due to strong returns and growing revenues. Not only was the industry able to improve its reputation, but it also grew to become more and more interesting for investors, even in risk-averse countries like Germany. The ability of the private equity industry to achieve high returns was driven by different factors, such as the high incentives for both private equity portfolio managers and for the operating managers of businesses in the portfolio. On the other hand, the aggressive use of debt provided by banks with low-interest rates helped the industry to invest with a high leverage ratio. While the industry was able to use financing and tax advantages, which are not open to other companies, they used the advantage of being less regulated.
Additionally, the high confidence in the industry is a reason for the growing interest. A recent survey of institutional investors found that 49 percent of markets analysts expect private equity to outperform the public equity market by a strong 4 percent per year or more. In addition, 45 percent believe that private equity will outperform the public equity market by 2 to 4 percent per year. Because of this high confidence within the industry, private equity has grown to become one of the most attractive and an alternative investment opportunity.
Especially in regards to the financial market with low-interest rates and high multiples in the public equity market, there are reasons as to why private individuals are seeking alternative investment opportunities. Due to a growing economy, private equity funds have had years of strong growth and have been the biggest winner in the ten-year cycle since the global financial crisis. The global private equity industry still has more than US$v3.1 trillion in assets under management with US$ 1.1 trillion in cash, or so-called ‘dry powder’, to invest, based on the research of data provider Preqin. While looking at the industry statistics, it is apparent that private equity is already on the same path that they have been on prior to the financial crisis that took place in 2007.
Table of Contents
1 Introduction
1.1 Topic and Relevance
1.2 Research Question
2 Overview
2.1 Private equity strategies
2.2 Venture capital
2.3 Growth capital
2.4 Buyout
3 Business Models
3.1 Exchange traded funds
3.2 Listed private equity companies
3.3 Other business models
4 Performance
4.1 Stock market developments
4.2 Private equity market
4.3 Performance of private equity ETFs
4.4 Financial industry performance
5 Conclusion
Objectives and Topics
This paper aims to investigate the characteristics and attributes of publicly traded private equity products, providing a comprehensive guide for private individuals to gain exposure to the private equity market without the high capital requirements typically demanded by institutional-grade investments.
- Analysis of different private equity investment strategies (Venture Capital, Growth Capital, Buyouts).
- Evaluation of business models for retail access, including ETFs and listed private equity companies.
- Comparative performance analysis of private equity vs. public stock and financial sector benchmarks.
- Assessment of current market trends, risk profiles, and the outlook for 2019.
Excerpt from the Book
2.4 Buyout
A Buyout investment is an investment where a fund or a financial company acquires a majority in a private company. The intention of the buyer is always to benefit from the strong market position of the company and to sell the company at a later stage. After the acquisition, the employees of the buyer will transform the purchased company and develop a new strategy. They are creating a new business plan or applying a "buy and build" strategy. A "buy and build" strategy is a strategy where the fund managers are trying to create a significant player in the industry by adding smaller companies to the initial acquisition. The role of a fund manager who has just executed a buyout transaction plays a position as an active manager who supports the portfolio company's management with the refinancing of debt, new acquisitions or efficiently consolidating the business. Buyout transactions are always made under the assumption that the fund managers may be able to add value to the company if they take it private or put them into their portfolio. The value of a buyout transaction is not always classified as large cap. Transactions can be small-, mid- and large- cap transactions, which depends on the specialization of the fund. Buyout transactions are typically leveraged, which means that they contain debt to be able to finance the transaction. (Pignataro, 2014)
Summary of Chapters
1 Introduction: Discusses the rising importance of private equity as an investment asset class due to strong historical returns and institutional confidence.
2 Overview: Details the primary strategies within private equity, specifically covering venture capital, growth capital, and leveraged buyout operations.
3 Business Models: Explains the vehicles available for retail investors to enter the private equity market, such as ETFs and direct investments in listed firms.
4 Performance: Evaluates the financial performance of private equity relative to general stock markets and the financial sector, highlighting its resilience.
5 Conclusion: Summarizes the viability of traded private equity as a strategic, accessible, and stable alternative for individual portfolio diversification.
Keywords
Private Equity, Financial Engineering, Buyout, Venture Capital, Growth Capital, ETF, Asset Management, Leverage, Market Performance, Investment Strategy, Portfolio Diversification, Institutional Investors, Financial Crisis, Dry Powder, Retail Investment
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper focuses on the private equity industry, specifically exploring how individual investors can participate in this market through publicly traded products.
What are the primary investment areas discussed?
The main themes include private equity strategies, the classification of business models for market participation, and a comparative performance analysis against public markets.
What is the central research question?
The research asks how private individuals can overcome traditional investment barriers to participate in the private equity sector and which business models best facilitate this.
Which scientific methods are employed?
The author uses a descriptive and analytical approach, synthesizing industry data and market performance benchmarks to evaluate the efficacy of retail-accessible private equity instruments.
What topics are covered in the main body?
The main body treats the lifecycle of private equity strategies, the mechanics of ETFs and listed companies, and a performance study relative to broader equity indices.
Which keywords best characterize the work?
Keywords include Private Equity, Financial Engineering, Buyout, Venture Capital, ETF, and Portfolio Diversification.
How do private equity funds differ from traditional asset management?
Unlike traditional management, private equity involves direct operational influence in portfolio companies, often utilizing significant leverage and long-term restructuring strategies.
Why are private equity ETFs considered a viable option for retail investors?
They provide an easy, transparent, and affordable way to gain exposure to a diversified group of private equity companies without the high minimum pledge requirements.
What is the significance of the term 'dry powder' mentioned in the text?
It refers to the large amount of uninvested capital held by private equity firms, indicating high levels of liquidity and potential for future market activity.
- Quote paper
- Marc Jacob (Author), 2018, Publicy listed private equity, Munich, GRIN Verlag, https://www.grin.com/document/456467
