Chapter 2

Private equity fund economicsa

2.1 OVERVIEW

Private equity plays an increasingly important role in the financing of a wide range of businesses. Over the past 20 years, private equity has been one of the fastest growing markets for corporate finance. Private equity funds under management totaled about USD2.5tn at the end of 2009, more than double the amount in 2003 which stood at slightly less than USD1tn (CityUK, 2010).

By its very nature this market is private, not subject to the same disclosure requirements and regulation as the public markets and is characterized by poor levels of publicly available information. Thus, it is extremely challenging for the outsider to understand and form a view on the workings of the industry.

The stated purpose of a private equity fund is normally to make equity investments in an unlisted company (or more typically, a number of companies). However, private equity finance can be applied to other parts of a company’s capital structure (e.g., mezzanine or junior debt) and into companies at different stages of their development (turnarounds, startups, or buyouts), in different geographies (one county or pan-regional) and with different control rights (i.e., minority investments or majority ones).

The substantial majority of private equity investments is made through funds whose legal structure is that of a limited partnership. These funds are created (raised) for the specific purpose of making private equity investments. Such partnerships ...

Get International Private Equity now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.