Publicy listed private equity

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

6 Executive Summery

7 Bibliography

1 Introduction

1.1 Topic and Relevance

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 aggres- sive 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 inter- est. A recent survey of institutional investors found that 49 percent of markets ana- lysts 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 (Mergermarket, 2018).

Especially in regards to the financial market with low-interest rates and high multi- ples 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 indus- try 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. (Preqin, 2018) While looking at the industry statistics, it is appar- ent that private equity is already on the same path that they have been on prior to the financial crisis that took place in 2007. By then, the multiples for a buy-side case have been at average at 8.9x EBITDA. Once more, deal prices reached 8.9x in 2013 and are now up to nearly 11x EBITDA. While those numbers may be an indicator for a decrease in growth, investors are still confident that private equity is a better alternative for investment than the overall public equity market (cookandbynum, 2018).

When taking into account the German and European private equity market, we can see improvements in the market in 2017, whether it is on a volume or value basis, which consists of both buyouts and exits.

With about 2,200 transactions and a value of about € 250.1bn, the market in- creased by 6.9% in volume and 14.4% in value. The overall market has reached a post-crisis high on both fronts, with all asset classes being sought after and show- ing a further growth after a very strong year in 2016. With a strong CAGR of 9.2% since 2012, the European deals market is growing by strong numbers, besides political uncertainty, as well as market volatility and low growth macroeconomic conditions. (PricewaterhouseCoopers, 2018)

1.2 Research Question

As seen in the examples mentioned, the industry is very appealing for professional and private investors as an alternative for the classic investment into exchange- traded companies. The issue with private equity is that when it comes to the op- portunists to invest in those funds, it mostly narrows down to institutional investors or high-net-worth individuals. Listed private equity companies or funds are a pos- sibility for private investors to participate in the industry and its growth. In the fol- lowing, 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.

2 Overview

2.1 Private equity strategies

Private equity companies are a part of the financial industry with a business model that consists of investing money in companies. They work differently than classic asset management companies and make investments directly into private compa- nies or conduct buyouts of public companies that result in a delisting of public eq- uity. In every case, the capital for the funds is raised from institutional investors or individuals with a high net worth since the minimum pledge for each fund normally exceeds $1 Million. The raised funds are used to make an investment into start- ups, make acquisitions, or for special situations. Each fund has a different strategy for investing in companies. Some funds target companies with a slowing business model (turnaround) or even distressed companies, while others are focused on companies that have a management team with a credible reputation or a company that displays exceptional growth. Each fund has a different approach to its in- volvement into the operational business of its portfolio company. While some de- termine the direction of a company, others are focused on providing its companies with independence for their decisions. In order to understand the different possibili- ties of investments, there are various private equity approaches that I will explain in order to understand this concept.

The common strategy for a private equity fund is to act as a leader who leads companies in transforming their business, adding value and establishing a new structure. However, diverse investment strategies are being used depending on where the company is in its life cycle. Each stage of a company’s life cycle exhibits a certain risk profile and requires a specific set of skills from the general partner. Three different life cycles and its strategies will be explained in the following sec- tion. Because private equity has different investment opportunities for every life cycle, I will explain the strategies in order to demonstrate the different concepts accurately. (Pignataro, 2014)

2.2 Venture capital

Taking the life-cycle approach makes venture capital the earliest form of private equity It refers to investments made in companies with no or only small revenues. In this stage, venture capitalist invest into companies that have displayed a “proof of concept,” which means that they have indicated that the idea behind the busi- ness works but don’t have any running business yet. A venture capital fund ac- cepts a potential risk of failure for their investments. The praxis shows that an un- successful investment usually leads to a total loss because the company isn’t able to transform an idea into a working business, while a successful outcome usually has a very high return for the investor. The performance of a fund is usually driven by a small amount of successful transaction while the majority is unsuccessful. An example of a listed venture capital firm is GSV Capital Corp. (Zider, 1998)

2.3 Growth capital

Growth capital is recognized for investments into companies, in terms of how to seek capital to finance its growth strategy. In such a case, a private equity fund would seek a minor investment into the company and work together with the com- pany to implement the strategy. This kind of capital is common if a company is entering a new market or restructuring its business. Those investments are interesting for private equity companies since they enable a fund to participate in a growth strategy that will not take the risk. (cookandbynum, 2018)

2.4 Buyout

A Buyout investment is an investment where a fund or a financial company ac- quires 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 busi- ness 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 transac- tions 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. Transac- tions can be small-, mid- and large- cap transactions, which depends on the spe- cialization of the fund. Buyout transactions are typically leveraged, which means that they contain debt to be able to finance the transaction. (Pignataro, 2014)

On the other hand, a smaller portion of private equity is known as the so-called “special situations funds,” which invests in companies that are restructuring them- selves or are distressed and thus, need a turnaround. Such situations are unusual, as only specialized funds are taking investment into consideration. In this catego- ry, investment in equity and equity-related instruments, as well as a debt instru- ment, are executed. (ventuscorporate, 2018)

3 Business Models

The public traded private equity market is typically divided into three different are- as, which will be described in the following. The different business models are of- fering individuals and people with a bank account to make private equity invest- ments. The difference between those products is relating to the type of investment private individuals can make. It is possible to invest in “private equity ETFs,” which offers an investment into the private equity industry without any specifications. The other option is to invest in traded private equity companies who are traded on the stock exchange like any other company. Investors who are primarily focused on special funds with a sector emphasis are “traded funds,” which offer the invest-ment into a special fund, which involves investing the raised money. The three different options are a part of traded private equity products and will be described in the following.

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