Private Equity InvestmentsIn finance, Private Equity is an Asset Class consisting of Equity Securities and Debt in operating companies that are usually not publicly traded 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.
Private Equity (PE) Houses are involved in the purchase and acquisition of Shareholdings of Listed and Unlisted Companies. PE firms make these acquisitions by investing the capital they have raised from Institutional Investors, such as Pension and other funds. See www.kpmg.co.za
PE Houses create value by investing in shareholdings of companies (both majority and minority positions), active management of these portfolio investments over the medium- to long-term, implementation of value generation ideas within the portfolio companies and then ultimately, the realisation or sale of these companies.
PE Houses typically acquire companies which they believe are undervalued by the market and offer value-generation opportunities through company growth, financial and operational restructuring, the sale of assets or the strengthening of management etc. After this enhancement in value is achieved these companies are realised/ sold through trade sales, IPOs or sold to other PE Houses ( For Example Brait Private Equity buying 80 % of Virgin Active ).
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Private Equity is capital that is put into a new or growing business in return for part-ownership of the business and a share of the profits. Typically, a Private Equity or Venture Capital Investor does not want permanent ownership of your business. They want to " exit " your business within five to seven years by selling the shares you gave them, and they want a Return on Investment of at least 35 % per year. In other words, if they invest R1 million in your business, they want to get at least R2,75 million when they sell their shares in five years' time.
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Until early 2000, funding structures in South Africa comprised of only two components : Senior Debt provided by the Banks, and Equity that was provided by Private Equity Funds and other institutions such as the Industrial Development Corporation.
Big Picture Differences — The Business Model
Put plainly, Investment Banking is an advisory/ capital raising service, while Private Equity is an investment business. An Investment Bank advises clients on transactions like Mergers and Acquisitions, restructuring, as well as facilitating capital-raising.
The popularity of Private Equity Firms — which use Investors’ money and plenty of debt to buy entire companies — has fed a tense standoff between these firms and the Investment Banks.
36 % of junior Investment Bankers who started two-year jobs in 2012 have now joined Private Equity Firms, while only 27.5 % stayed in the same group at their bank.
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