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What is Private Equity?

Private Equity (English: private equity) is the English term for the of private equity investors procured in contrast to public equity, to which the the stock of capital is acquired.

The term also has a controversial form of investment Input in the language found. On Private Equity, OTC financial companies have specialized in the buy with the help of private investors all the companies or interests in them to restructure them and resell the medium term with the highest possible profit.

business model

The business model of private equity firms is to acquire companies or interests in companies that are typically classified as undervalued. Occurring as a financial investment companies are not interested in a strategic investment, but only pursue the objective of the investment with the highest returns possible. The return is in usually by strong restructuring measures (shifting production abroad, layoffs, divestiture, spin-offs, etc.) in the acquired companies achieved.

characteristic of private equity investments is the short investment horizon of about 3 to 6 years. After this time the investments are sold at a profit, or placed on the exchange.

The required for the investment capital will be collected by private investors, pension funds, pension funds and insurance , receiving in return so-called private equity funds. The risk of such investments is an annual return on capital employed of often 20-40 Percent over. However, there are a number of private equity firms seeking a much more serious yield level in line with the development of the stock market. Not the return is paid out as income funds. To spread risks more investments are mostly concentrated in a fund that also has a limited duration.

When Fremdkapitalbeschafftung exclusively via publicly traded company, it is called "Institutional Equity.

substitution of equity

One of the first steps after the acquisition of a company usually there is, companies to reduce the capital and back get as much as possible of the capital used to purchase again. This capital will be replaced by leveraged debt. Interest and principal payments, the loans will be charged to the company and must be earned by him. This process is referred to as "recapitalization" and increases the risk for private investors and the company, its debt load significantly increases. So that the "recapitalization" works, the company needs a stable cash flow. The high rates of credit is a risk that the company is limited in its ability to act and barely own investment the future existence of competing active and can thus losing economic strength. Press

dissemination

While private equity firms in the Anglo-American market for more than 20 years, there in recent years and increasingly in Europe such financial investors, whose business is increasing strongly.

The Germany invested in private equity capital in 2002 was still 6.9 billion euros. 2004 wares already 22.5 billion euros. The increase is due to the fact that the sale of stakes in companies recently legally tax-free is.

The global ratio of private equity firms on acquisitions in 2000 was 3 percent. In 2004, he had grown to 14 percent and had a volume of 294 billion dollars. To make purchases of very large corporations, they are increasingly contractors. An important role behind the private equity firms, banks play: are usually in debt-financed acquisitions of companies, so-called leveraged buy-outs, up to two thirds of the purchase price paid for with debt. In the absence of highly profitable investment alternatives and the possibility of credit risk by passing on to other banks (called syndication) to scatter is expected in the future a further strong increase of bank-financed acquisitions by private equity consortiums.

known private equity firms are Advent, Apax Partners, BC Partners, Blackstone, Carlyle Group, CVC, Doughty Hanson, Kohlberg Kravis Roberts & Co., Permira, Saban Capital and investment banks like Goldman Sachs

Political and social reactions

Private equity firms are often criticized because they maximize their business according to their purpose of investing in financial terms. Because the business approach of the financial investors usually heavily at the expense of the affected workforce, these are financial investors in the political debate in Germany as a "market radical." But in the U.S. they are considered since the spectacular takeover of RJR Nabisco for more than 30 billion dollars as "exploiters" and "business hunters.

Some economists look at private equity investments has the positive effect that a company can be converted in a short time and made fit for competition. This is especially if the company is not its transformation on its own is able to finance through the stock market, and banks have denied the necessary loans.

Link: Private Equity - Wikipedia