private equity 101: anatomy of an investment
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Long-term investing to build stronger, more competitive companies.
PRIVATE EQUITY: THE BASICS
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…
PRIVATE EQUITY IS…
A source of capital for companies in need.
PRIVATE EQUITY IS…
A key driver of economic growth and innovation.
PRIVATE EQUITY IS…
A job creator and employer of millions of
Americans across the country.
PRIVATE EQUITY IS…
A steady source of income for its investors
such as public and private pension funds, university
endowments and charitable foundations.
HOW PRIVATE EQUITY WORKS
Private equity firms seek out underperforming or undervalued companies.
By working with these companies managers unlock significant value by:• improving business strategy• injecting managerial expertise • advancing production technology• expanding distribution
The essence of private equity is the alignment of interests between management and business owners. This structure supports long-term planning without constant pressure of delivering quarterly results to public shareholders focused on short-term results.
There is one shared objective: increasing company value. Together, management and owners make business decisions to achieve this goal.
THE PRIVATE EQUITY ADVANTAGE
Private equity funds are typically structured as partnerships:
Portfolio Company 2
Portfolio Company 1 Portfolio Company 3
Private Equity Fund(Limited Partnership)
Private Equity Fund
Manager (GP)
Limited Partner
Investors (LP)
THE PRIVATE EQUITY MODEL
Private equity firms generally invest in companies for several years or more. The goal — in every case — is to work with management to improve the company’s performance and make it a stronger, more competitive enterprise.
PRIVATE EQUITY IS A LONG-TERM INVESTMENT
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
WHO INVESTS IN PRIVATE EQUITY?
Pension funds are the largest investors in private equity.
Public Pension Funds; 29%
Private Sector Pension Funds; 13%
Foundations; 12%
Banks & Investment Banks; 9%
Insurance Companies; 9%
Endowment Plans; 9%
Sovereign Wealth Funds; 6%
Other; 13%
(based on capital invested in 2010)
WHO BENEFITS FROM PRIVATE EQUITY?
Limited partner investors receive the lion’s share of returns generated by private equity.
Original Investment - $10 billion
Profit - $4.3 billion
Profit - $15.6 billion
Limited Partner Investors Private Equity Fund Managers
Returns from $10 billion fund assuming a 3x multiple
PRIVATE EQUITY PROVIDES SUPERIOR RETURNS
Private equity investing provides outsized returns to help investors meet their retirement, educational and charitable goals.
U.S. Private Equity Index Top Quartile Private Equity Funds(Vintage Year 2001)
S&P 500 Index Russell 2000 Index0%
10%
20%
30%
40%
50%
11.3%
39.6%
2.7%6.3%
10-Year Annualized Return
Private equity-backed companies increase their net earnings 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 manufacturing firms.
CREATING VALUE
Private equity-backed companies that went public have outperformed their competitors and the markets.
IMPROVING COMPETITIVENESS
Productivity at private equity-backed companies grows 2 percentage points faster than at their competitors.
Private Equity-Backed Companies Publicly Traded Competitors0%
10%
20%
30%
23%
12%
Average Return in 2010
DRIVING ECONOMIC GROWTH
Private equity invests in a wide variety of industries.
Industrials; 19%
Business Services; 18%
Consumer; 18%
Healthcare; 10%
Information Technology; 8%
Telecoms & Media; 10%
Food & Agriculture; 10%
Energy; 5%Other; 2%
(based on capital invested in 2010)
Since the start of the Great Recession, private equity has invested almost $8.6 billion in 59 bankrupt companies.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD$0
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AIDING ECONOMIC RECOVERY
Private equity is a source of financing during periods of tight credit.
INVESTING IN JOBS
Companies in the top ten states receiving private equity investment employ more than 4.5 million people.
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(based on capital invested 2000-2010)
Visit www.pegcc.org to find out more about the private equity industry.
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