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Private Equity 101: Anatomy of an Investment


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Private Equity 101: Anatomy of an Investment

  1. 1. PRIVATE EQUITY: THE BASICSLong-term investing to build stronger, morecompetitive companies.
  2. 2. WHAT IS PRIVATE EQUITY? By definition, private equity is an asset class in which financial buyers purchase stakes in companies that are not publicly traded. But in reality, private equity is much more…
  3. 3. PRIVATE EQUITY IS… A source of capital for companies in need.
  4. 4. PRIVATE EQUITY IS… A key driver of economic growth and innovation.
  5. 5. PRIVATE EQUITY IS… A job creator andemployer of millions of Americans across the country.
  6. 6. PRIVATE EQUITY IS… A steady source of income for its investorssuch as public and private pension funds, university endowments and charitable foundations.
  7. 7. Private equity firms seek outunderperforming or undervaluedcompanies.By working with these companiesmanagers unlock significant value by:• improving business strategy• injecting managerial expertise• advancing production technology• expanding distribution HOW PRIVATE EQUITY WORKS
  8. 8. The essence of private equity is the alignment of interestsbetween management and business owners. This structuresupports long-term planning without constant pressureof delivering quarterly results to public shareholdersfocused on short-term results.There is one shared objective: increasing company value.Together, management and owners make businessdecisions to achieve this goal. THE PRIVATE EQUITY ADVANTAGE
  9. 9. Private equity funds are typically structured aspartnerships: Private Limited Equity Fund Partner Manager Investors (GP) (LP) Private Equity Fund (Limited Partnership) Portfolio Company 1 Portfolio Company 3 Portfolio Company 2 THE PRIVATE EQUITY MODEL
  10. 10. Private equity firms generally invest incompanies for several years or more. The goal— in every case — is to work withmanagement to improve the company’sperformance and make it a stronger, morecompetitive enterprise. PRIVATE EQUITY IS A LONG-TERM INVESTMENT
  11. 11. The private equity industry…• Includes more than 2,400 U.S. based private equity firms, and 3,400 worldwide.• Invests more than $1.6 trillion in 15,200 U.S. based companies over the last ten years.• Sponsors companies that employ more than 8 million workers worldwide. BASIC INDUSTRY FACTS
  12. 12. Pension funds are the largest investors in private equity. Other, 13% Public Pension Sovereign Wealth Funds, 29% Funds, 6% Endowment Plans, 9% Insurance Companies, 9% Private Sector Pension Funds, 13% Banks & Investment Banks, 9% Foundations, 12% (based on capital invested in 2010) WHO INVESTS IN PRIVATE EQUITY?
  13. 13. Limited partner investors receive the lion’s share ofreturns generated by private equity. Limited Partner Investors Private Equity Fund Managers Profit - $15.6 billion Profit - $4.3 billion Original Investment - $10 billion Returns from $10 billion fund assuming a 3x multiple WHO BENEFITS FROM PRIVATE EQUITY?
  14. 14. Private equity investing provides outsized returns tohelp investors meet their retirement, educational andcharitable goals. 10-Year Annualized Return 50% 40% 39.6% 30% 20% 10% 11.3% 6.3% 0% 2.7% U.S. Private Equity Index Top Quartile S&P 500 Index Russell 2000 Index Private Equity Funds (Vintage Year 2001) PRIVATE EQUITY PROVIDES SUPERIOR RETURNS
  15. 15. Private equity-backed companies increase their netearnings through: revenue growth (40% of gains) cost reductions (30%) acquisitions (20%)Private equity transactions have yielded as much as$15 billion in additional output at manufacturingfirms. CREATING VALUE
  16. 16. Private equity-backed companies that went public haveoutperformed their competitors and the markets. Average Return in 2010 30% 20% 23% 10% 12% 0% Private Equity-Backed Companies Publicly Traded CompetitorsProductivity at private equity-backed companies grows2 percentage points faster than at their competitors. IMPROVING COMPETITIVENESS
  17. 17. Private equity invests in a wide variety of industries. Other, 2% Energy, 5% Industrials, 19% Food & Agriculture, 10% Telecoms & Media, 10% Business Services, 18% Information Technology, 8% Healthcare, 10% Consumer, 18% (based on capital invested in 2010) DRIVING ECONOMIC GROWTH
  18. 18. Since the start of the Great Recession, private equity hasinvested almost $8.6 billion in 59 bankrupt companies. Deal Value (Mil.) Number of Deals $6,000 30 Deal Value (Mil.) Number of Deals $5,000 25 $4,000 20 $3,000 15 $2,000 10 $1,000 5 $0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTDPrivate equity is a source of financing during periods oftight credit. AIDING ECONOMIC RECOVERY
  19. 19. Companies in the top ten states receiving private equityinvestment employ more than 4.5 million people. Capital Invested Number of Employees $250,000 1,000,000 Capital Invested Number of Employees $200,000 800,000 $150,000 600,000 $100,000 400,000 $50,000 200,000 $0 0 (based on capital invested 2000-2010) INVESTING IN JOBS
  20. 20. Visit to find out more about the private equity industry. Sponsored by