Introduction to Private Equity

Foreword

Private equity can be described as ‘investments in private companies in privately negotiated transactions’. This means that private equity is an asset class that is normally opaque, illiquid and difficult to analyse.

However, private equity investing offers many advantages compared to investing in public and more liquid asset classes. The underlying companies can be acquired in a private transaction, often in a specific process leading to attractive acquisition. The companies can be developed privately on the long term, hence maximizing their chances to succeed, when most public companies are only targeting short term benefits. Fund managers active in private equity normally have much more information when they make investment decisions compared to those investing in public companies. Incentives for the management can be better aligned with the investors’ interests. Fund managers exercise a higher degree of control on the companies they have invested in, and develop them aggressively without having to worry about how every decision is understood by the public. Through private equity investments, investors can target industries or niches where there are no public companies.

Private equity is a very complex asset class, more of an art than other forms of investments which are analyzed and compared quantitatively. Private equity is an asset class where manager selection plays the highest role of all asset classes. There are normally several private equity managers that are ...