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Definition of Private Equity
Definition of private equity
Private equity investing may broadly be defined as “investing in securities through a negotiated process”. The majority of private equity investments are in unquoted companies. Private equity investment is typically a transformational, value-added, active investment strategy. It calls for a specialised skill set which is considered in more detail in Part 5 and which is a key due diligence area for investors’ assessment of a manager. The processes of buyout and venture investing call for different application of these skills as they focus on different stages of the life cycle of a company.
Private equity investing is often divided into the broad categories described below. Each has its own subcategories and dynamics and whilst this is simplistic, it provides a useful basis for portfolio construction, which is discussed in Part 3. In this paper, private equity is the universe of all venture and buyout investing, whether such investments are made through funds, funds of funds or secondary investments.
Venture Capital
Described as the “business of building businesses”, venture capital is investing in companies that have undeveloped or developing products or revenue. Venture capital has a particular emphasis on entrepreneurial undertakings and less mature businesses.
Seed stage |
Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase. |
Start-up stage |
Financing for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their products commercially and will not yet be generating a profit. |
Expansion stage |
Financing for growth and expansion of a company which is breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development, and/or to provide additional working capital. This stage includes bridge financing and rescue or turnaround investments. |
Replacement Capital |
Purchase of shares from another investor or to reduce gearing via the refinancing of debt. |
Buyout
A buyout fund typically targets the acquisition of a significant portion or majority control of businesses which normally entails a change of ownership. Buyout funds ordinarily invest in more mature companies with established business plans to finance expansions, consolidations, turnarounds and sales, or spinouts of divisions or subsidiaries. Financing expansion through multiple acquisitions is often referred to as a “buy and build” strategy.
Investment styles can vary widely, ranging from growth to value and early to late stage. Furthermore, buyout funds may take either an active or a passive management role.
Special Situation
Special situation investing ranges more broadly, including distressed debt, equity-linked debt, project finance, one-time opportunities resulting from changing industry trends or government regulations, and leasing. This category includes investment in subordinated debt, sometimes referred to as mezzanine debt financing, where the debt-holder seeks equity appreciation via such conversion features as rights, warrants or options.
Source: www.evca.com
