Private Equity As An Asset Class

Private Equity Overview

The Private Equity Industry Has Seen Significant Growth As An Asset Class

Over the past two decades, the private equity industry has seen significant growth as an asset class. With record breaking deals taking place like the acquisition of the Equities Office Properties Trust by Blackstone for $38.9 billion, Hospital Corp. of America by Bain Capital, KKR and Merrill Lynch for $32.7 billion and Hertz for $15.0 billion by Carlyle, CD&R and Merrill Lynch, private equity as an alternative investment vehicle is reforming the world’s economy. A record $686bn of private equity was invested globally in 2007, up over a third on the previous year and more than twice the total invested in 2005. Private equity fund raising also surpassed prior years in 2007 with $494bn raised, up +10% on 2006. Not only is the unprecedented growth of the asset class impressive, the prospect it holds for future expansion is striking.

More and more investors are becoming interested in this asset class. When properly structured, private equity can be one of the most rewarding sector of an investment portfolio consisting of fixed income assets and traditional equity.

Private Equity As An Asset Class

Private equity investors invest primarily in unlisted operating companies held privately. A private equity fund consists of a pool of monies raised from different sources such as corporations, High Networth Individuals (HNI) and Family Offices, Insurance Companies and Pension Funds and is managed by specialist managers to invest in private portfolio companies. The objective is to sell the portfolio company at a higher price after a few years of value development, thus generating profits for the fund’s investors.

History of private equity industry

Even though the roots of private equity can be traced back 50 years the private equity industry formally took off in 1970 with the first structured private equity funds in the United States and the United Kingdom. Regulatory changes were the key growth drivers for banks and pension funds that sketched the private equity markets. By 1990, private equity started attracting institutional investors and gained momentum in terms of fund raising and number of deals closed. In the year 2000, private equity reached its peak with $200 billion invested worldwide thus having grown faster and bigger than any other asset class.


North America is the homeland of private equity activity. North America accounts for the majority of total AUM (57%), followed by Europe (24%), Asia (13%) and Rest of World (6%). This pattern illustrates the varying stages of development of the industry across these regions. However, with the asset class gaining traction in emerging economies and Limited Partners seeking to diversify their portfolio in terms of risks and returns, regions like Asia have increasingly become an integral part of the private equity and venture capital universe.

Classification of Private Equity funds

The Private Equity asset class can be broadly segregated into three categories

Leveraged Buyouts (LBO)

Commonly known as buyouts, these are investments made in mature companies that have an operating history, revenues and cash flows. These companies are ‘bought-out’ from the owners where in the business, the business unit or the asset is acquired with the use of financial leverage. There are two types of LBOs.

  • Management Buy Outs (MBOs) in which the existing management buys out the company from existing shareholders using a mix of leverage and equity raised from Private Equity investors and.
  • Management Buy Ins (MBIs) in which a manager or a management team from outside the company raises the necessary finance, buys it, and becomes the company’s new management.
Venture Capital

These are investments made in lesser mature companies that are further sub categorized according to their stage of development like;

  • Early Stage capital development that requires seed capital to launch businesses or for the early development of companies that might be generating revenues but may not yet be profitable.
  • Later Stage capital development in which investors bring in capital to finance expansion, or as replacement capital for existing investors.
  • Pre-IPO / Mezzanine capital in which investors bring in capital to meet liquidity requirements prior to an IPO issue
Growth Capital

These investments are made in more mature companies that require capital for the purpose for expanding business into new territories, restructuring, or making acquisitions without the loss of management control. Such investment is normally made in private companies but can also be made in public companies through preferential placements (also known as Private Investment in Public Enterprises (PIPEs).