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Sarah sobieski | The Basics Of Private Equity


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What Is Private Equity?

Private equity refers to firms that put big chunks of cash from sources such as pension funds or endowments into buying not publicly traded and (often) faltering businesses or assets and selling them for a profit. Private equity invests in a wide variety of industries. It is an asset class consisting of equity securities and debt in operating companies that are on a stock exchange. A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor.

Just over six years after the Dodd-Frank Act became effective, private equity firms impacted by the law could get some relief if a bill they’ve championed makes it through an upcoming vote in the House of Representatives. (September, 2016).

After the 2008 financial crisis, private equity took a hit from federal regulators. Beforehand, they faced little oversight. Afterward, they suddenly found themselves with a bunch of new regulatory exams and reporting obligations. While they can play some risky games PEs aren’t as regulated as your normal bank.

PE firms make money off of deals by taking 2 percent of the money it manages and a 20 percent (commission) of the profits above a certain baseline.

What Is Dodd-Frank?

Dodd-Frank was a Wall Street reform bill that was thought up after the 2008 financial crisis to try and avoid a repeat of that disaster. It was the first major change to federal financial regulations in the United States since reforms that came just after the Great Depression.

While it had plenty of critics, it has been championed by many who point out that it succeeded in at least some ways. The SEC reportedly has been taking action against private equity firms lately, including at least one crack down on an adviser who decided not to register as a broker (brokers with more than 15 clients need to register). That case was settled.

Opponents of the House bill point to those successes as reason to keep the rules how they are and not to loosen them.

What Does This New Bill Do?
OK, so it isn’t a repeal of Dodd-Frank, but it does loosen requirements for private equity firms when it comes to what information they have to provide to the SEC. That includes, most importantly, loosened rules for reporting what types of commodities the firms are buying and who is running the show as an adviser.

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Sarah sobieski | The Basics Of Private Equity

  1. 1. Slide Long-term investing to build stronger, more competitive companies. PRIVATE EQUITY: THE BASICS
  2. 2. WHAT IS PRIVATE EQUITY? By definition, private equity is an asset class in which financial buyers purchase stakes in companies that are not publicly traded. But in reality, private equity is much more…
  3. 3. PRIVATE EQUITY IS… A source of capital for companies in need.
  4. 4. PRIVATE EQUITY IS… A key driver of economic growth and innovation.
  5. 5. PRIVATE EQUITY IS… A job creator and employer of millions of Americans across the country.
  6. 6. PRIVATE EQUITY IS… A steady source of income for its investors such as public and private pension funds, university endowments and charitable foundations.
  7. 7. HOW PRIVATE EQUITY WORKS Private equity firms seek out underperforming or undervalued companies. By working with these companies managers unlock significant value by: • improving business strategy • injecting managerial expertise • advancing production technology • expanding distribution
  8. 8. The essence of private equity is the alignment of interests between management and business owners. This structure supports long-term planning without constant pressure of delivering quarterly results to public shareholders focused on short-term results. There is one shared objective: increasing company value. Together, management and owners make business decisions to achieve this goal. THE PRIVATE EQUITY ADVANTAGE
  9. 9. Private equity funds are typically structured as partnerships: Portfolio Company 2 Portfolio Company 1 Portfolio Company 3 Private Equity Fund (Limited Partnership) Private Equity Fund Manager (GP) Limited Partner Investors (LP) THE PRIVATE EQUITY MODEL
  10. 10. Private equity firms generally invest in companies for several years or more. The goal — in every case — is to work with management to improve the company’s performance and make it a stronger, more competitive enterprise. PRIVATE EQUITY IS A LONG-TERM INVESTMENT
  11. 11. The private equity industry… • Includes more than 2,400 U.S. based private equity firms, and 3,400 worldwide. • Invests more than $1.6 trillion in 15,200 U.S. based companies over the last ten years. • Sponsors companies that employ more than 8 million workers worldwide. BASIC INDUSTRY FACTS
  12. 12. WHO INVESTS IN PRIVATE EQUITY? Pension funds are the largest investors in private equity. (based on capital invested in 2010)
  13. 13. WHO BENEFITS FROM PRIVATE EQUITY? Limited partner investors receive the lion’s share of returns generated by private equity. Original Investment - $10 billion Profit - $4.3 billion Profit - $15.6 billion Limited Partner Investors Private Equity Fund Managers Returns from $10 billion fund assuming a 3x multiple
  14. 14. PRIVATE EQUITY PROVIDES SUPERIOR RETURNS Private equity investing provides outsized returns to help investors meet their retirement, educational and charitable goals. 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7 7.7 8.4 9.1 9.8 10-Year Annualized Return
  15. 15. Private equity-backed companies increase their net earnings through: revenue growth (40% of gains) cost reductions (30%) acquisitions (20%) Private equity transactions have yielded as much as $15 billion in additional output at manufacturing firms. CREATING VALUE
  16. 16. Private equity-backed companies that went public have outperformed their competitors and the markets. IMPROVING COMPETITIVENESS Productivity at private equity-backed companies grows 2 percentage points faster than at their competitors. 0 1 2 3 4 5 6 7 8 9 10 Average Return in 2010
  17. 17. Private equity invests in a wide variety of industries. Since the start of the Great Recession, private equity has invested almost $8.6 billion in 59 bankrupt companies. 0 2 4 6 8 10 12 0 2 4 6 8 10 12 Deal Value (Mil.) Number of Deals AIDING ECONOMIC RECOVERY Private equity is a source of financing during periods of tight credit.