Friday, March 18, 2011

What is Private Equity ?

What is Private Equity ?

Well, I got a good exposure to Private Equity when I attended the 1 day workshop by one of the renowned PE players in India when he visited the XLRI Jamshedpur campus.

So here is what Private Equity or PE is: Private +Equity

It's private which means that the way it operates is not known to public and equity is nothing but stake.
So what a private equity firm does is it invests a corpus in a portfolio of companies.

Now, where is this money coming from and who is managing it ?
The funds are invested by players known as LPs (Limited Partners) and fund is managed by GPs (General partners)

So, basically GP is the one who is investing the fund in 1 or more companies (portfolio of companies)

If LP is gone, GP is gone too ! In simple terms, if LP stops putting in money, PE firms start facing issues.

This is exactly what happened during recession. LPs were not willing to put in money in new companies and so PE firms had a tough time.

Ok, I got it. But what's the difference between PE firm and a VC(Venture capital firm) ?
Well VC firm typically provides seed funding to startups. The VCs get you started. They take stake in the company but let the owners run the company independently. Whereas a PE firm would nurtue (harvest) the company and would not invest at seed-fund level.

In PE, the crucial aspect is that of timing- meaning that when should a PE firm get in a company and when to get out (exit)

So who are the major players in PE? Well KKR, Carlyle group and Blackstone are world renowned PE firms. PE industry is known because of US/ UK as it started here.
But these days PE firms are coming to Indian as well as other emerging markets like China too - where they see huge growth potential.

So, what is it that PE firm makes? Ok, good question. Well this industry typically works on 2+ 20 model. Let me explain it further..

2 means 2% of assets managed by the PE firm. This amount is taken by PE firm as operating fees.

20 means 20% of the investment profits goes to PE firm.

So there is huge money in the PE industry- and so it the risk. If the company that the PE firm is investing in does not picks up and closes down- it can be a huge loss too !

I hope you got an overview of this industry. In my future posts, I will cover more on PE and the way this industry works. Any suggestions - more than welcome..


Balaji said...

Good One Ankit


Pradeep Khan said...

Can you share the PPT of that session in case you have it?

Pradeep Khan said...

Good one Ankit !!
Can you please share the PPT of the session, in case you are having it ?

Jitendra Yadav said...

Nice Article Ankit... and keep sharing the links to ur further articles..

Holiday in Kerala said...

Great Post. You should have written about Angel Funding as well :)

Unknown said...

nice one.