A comprehensive study on private equity and its investment practices

IntroductionPrivate Equity (PE) is a well-known asset class in the finance and investment banking industry. The common feature of private equity securities is the illiquidity of these investments, in fact, the private equity securities is completely opposite of public securities in terms of liquidity. When an investor buys stock of Microsoft and becomes dissatisfied with the company’s performance, he can simply sell the stock and cash out his invested capital at any point of time. However, this is not the true for the private equity investors; they invest in a company with a mission to fix all the issues, manage the situation and create substantial value in investment rather than sell the securities.“Private Equity” has been defined and explained by numerous researchers, professors and investment professional; based on Investopedia—“Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet”. N. Bulent Gulekin, Wharton Professor of Finance defines private equity—“Private equity is an investment vehicle investing anywhere from early-stage to late-stage companies, with the hope that they can run these companies better. In the case of venture funds, they create wealth by investigation in just ideas”. The common investment strategies of private equity are venture capital, growth equity (capital), leverage buyout (LBO), distressed investments and mezzanine capital. One of the common confusing things about the private equity is terminology, especially with the difference between venture capital and private equity. In Europe, the term venture capital is frequently used to refer to the spectrum of private equity investments, from seed investments to the largest leverage buyouts. In the United States, the term private equity is refer to not all VC, Growth Capital, distressed capital, mezzanine fund but also to LBO , or else to all such investment except the seed venture investing. Some people also refer private equity is the transactions that are somewhere between venture capital and buyouts, such as growth equity and mezzanine funds (Josh Lerner, 2012). In this paper, we will consider all the privately funded investment and transactions under broad category of Private Equity (PE).Although, all the above mentioned funds fall under private equity, their name represents their investment and transactions strategies. For example, venture capital funds do the investment in early stage companies whereas growth capital invests in the companies who are in the growth stages. Leverage Buyout (LBOs) funds generally investments in the mature and established company with the aim to create value through operational efficiency and financial deal structuring or engineering , LBO funds investment in both private-to-private or public-to-private transactions. On the other hand, mezzanine financing is the provision of capital in the form of subordinated debt, structured to have greater return than straight debt and lower risk than equity.Later on, we will briefly discuss the details of private equity industry including, the economics of private equity industry, overall performance of local and global private equity markets, future of the private equity and finally the career prospects of students at global private equity industry.