A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

INDUSTRY OVERVIEW

1.

INDUSTRY OVERVIEW

1.1

1.1

Introduction to private equity

1.1.1

Definition

Private equity is private capital raised by a corporation, i.e. not raised on a public market, in a wide variety of situations, ranging from finance provided to business start-ups to the purchase of large, mature, quoted companies. It encompasses a broad range of strategies, instruments and investment sectors, devel- oped further in section 1.2. This includes venture capital, buyouts, fund of funds, mezzanine financing, distressed debt, private equity real estate, clean technologies, infrastructure, etc. In this publication, the term private equity will be used in a broad sense to include all these aspects. From the perspective of the company, private equity is a source of equity finance that of- fers an alternative to the traditional choice between bank lending and listing on the stock market, focused on growth and value creation 1 . • During the process of companies’ set up, for financing innovation and new technologies, through venture capital . Venture Capital is focused on young, entrepreneurial companies and is an essential part of value creation in the whole private equity financing cycle. It provides financing for start-ups at their inception or shortly after their first technical or commercial developments. Much of this segment is technology-related e.g. in new infor- mation and communication technologies, life sciences and healthcare, electronics and new materials industries. • In the later stage, on the occasion of an expansion project for companies having strong growth potential, through expansion capital (also known as growth capital ). Expansion capital financing is provided to purchase holdings in existing, generally profitable compa- nies by subscribing new capital. Portfolio companies have growth profiles that necessitate the consolidation of their financial structures e.g. to develop new products or services, set up a foreign subsidiary, make an acquisition or increase their capacity. • In the context of acquisitions, transfer or buy-out, through buy-out capital . Buy-outs focus on mature businesses with stable cash flows. Usually the private equity funds obtain con- trol of the target company. Leveraged buyout funds use leverage (debt) to help finance the purchase of the target company. • In the case of difficulties, through turnaround capital . Turnaround capital (also known as rescue capital ) consists in acquiring underperforming businesses or businesses in out-of- favour industries, to restructure them financially or operationally. We can distinguish different stages during which private equity plays a key role in the com- pany’s lifecycle, as displayed in figure 1:

1 Source EVCA, “Private equity and venture capital in the European economy”, 25 February 2009

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