What is Private Equity?

What do the three key features of the asset class mean?

1. Negotiation
   • Negotiation is a key feature because the companies are private companies and acquiring a significant stake, which private equity investors do, requires entering into negotiations with management and the owners. This results in more complex deals and requires the private equity investor to have negotiation skills.
2. Exit
   • The exit driven strategy of the private equity investment means that the PE investor needs to incorporate an exit strategy into his deal structure and then subsequently manage his investment so that it can be exited after 3 to 7 years.
3. Activism
   • The activist approach means that the PE investor needs to have the skills to act as a Board member of the company and sometimes get even more involved than that, depending on the type of investment, be it early stage or a mature company.

The history of private equity

The roots of private equity can be traced back to the period after World War II, although venture investments are as old as humanity itself. In the US ARDC, set up to commercialise technologies developed during WW2, led to Silicon valley. In the UK, the foundation of CDC and 3i spurred the development of the market. In the 80s, the market grew on the back of the LBO deals and Emerging Markets private equity started as well. There was further growth in the 90s based upon telecom and internet. The market peaked in 2007 and has reset to a lower level subsequently. More regulation was introduced in 2010.

What kinds of firms do we distinguish?

There are some seven thousand firms worldwide, employing 100 thousand people, the main hubs being London and New York, with other hubs in the US West Coast and some major European and Asian cities.  Of these so-called twenty or so “mega firms” control one half of all assets under management.