Private Equity Explained
What is Private Equity?
- A source of capital for companies in need
- A key driver in innovation, economic growth and sustainability
- A job creator and supporter of thousands of companies (and the jobs they provide) across America
- A source of wealth creation that supports retirements of teachers, firefighters, police, other civil servants as well as helping to fund education, medical research, and the arts
- A reliable source of income for its investor
Why Private Equity?
Understanding private equity
- Long-term capital usually locked up for 10+ years
- Invested through a negotiated process
- Majority of investments are in unquoted companies
- Typically entails a transformational, valued-added, active strategy
Drivers of enhanced performance in private markets
- Alignment of incentives between managers and owners
- Active participation in strategy, management and operations
- Less short-term pressure on performance
Reasons for investing in private equity
- Improve the risk/reward characteristics of a portfolio
- Compensated for illiquidity and market inefficiency
- Active company management without the constraints of the public market
- Private companies constitute a large portion of the overall market not addressed through other asset classes in an institutional portfolio
Who are Limited Partners?
- LPs are the investors into private equity funds which are managed by a General Partner (GP)
- Like shareholders in a corporation, LPs have limited liability to the extent of their investment and have no management authority
- LPs invest to achieve returns in the context of their institutional portfolio which may include other traditional investments like stocks and bonds
- To be an LP you must be a legally defined qualified investor, a class which includes public pensions, endowments, insurance companies, etc.
