Private Equity refers to finance that is made available for an equity share in companies that have potential for high growth. Importantly, private equity firms do not sell shares to raise enough capital for the investment. Instead, raise their capital from investing institutions like insurance companies, pension funds, endowments, and from filthy rich individuals. Private equity investors use this money together with loans and their commercial expertise to identify and invest in companies that have the potential to grow very first.
In analyzing private equity firms around the world, it is worth noting that these firms may have a different connotation depending on the country or region of the world. For example in Europe, private equity encompasses venture capital and buy-ins and buy-outs of management. In the United States, private equity and venture capital are separate investment entities and are considered leading capital sources for businesses in the country. On this basis of comparison, it is possible to see and understand the sophisticated nature of the U.S. scene as opposed to Europe, which is simpler.
Private equity investors have impact on various institutions in the world. A good example is the commercial banks. Bank of America, Citigroup and JP Morgan Chase are the leading lenders to private equity investors in America. They have also maintained high-yield bonds, a trend that is discouraging potential investors from buying. While this is the case, it is paramount to note that in the event private equity drops, these leading lenders would experience significant losses. This is because the lenders are holding up to $40 billion, which is unsellable debt.
Besides commercial banks, private equity equally affects investment banks. In particular, banks like Goldman Sachs, Merrill Lynch and Lehman Brothers Fin continue to grant bridge loans to private equity firms. In most cases, these loans are essential as they take care of the cost of acquisition before permanent funding is sourced. Whilst private equity firms have not used these loans largely in the past, there is likely to be an increase in their usage because of the hardships experienced in raising capital using traditional methods. In case this happens, then investment banks with retain high valued dollars in form of loans.
If the debt market status is, anything to go by then these banks could experience challenges getting secondary buyers, leaving them with chunks of unwanted loans. In the recent past, investment banks have also found themselves in guaranteeing of debts and securities in cases of acquisitions and IPOs. These however, come along with high fees for investment banks and a drop in private equity would result into negative and severe financial effects.
Even though there has been a general increase in private equity deals, mid sized companies have recorded low acquisitions. For larger companies, they experience a fair game despite the fact that some of the companies are extremely too large to be considered for acquisitions. For this reason, such companies benefit from privatization, which occurs in individual industries. As these smaller companies are privatized, private equity investors new in the industry have limited options based on stocks.
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