Private Equity Market

Private equity is a financial asset that is comprised of equity securities. It is not publicly-traded on the stock market. Instead, used as an investment tool, it provides capital for business enterprises and financial transactions. Companies structure private equity in many ways to meet the financial and investing needs of an organization. They use it as an investment strategy to control, or acquire, or maintain a controlling interest in a company.

Four common strategies include the following: leveraged buyouts, venture capital, growth capital, and secondary investments. Private equity investments include four additional, but riskier, adjacent markets: real estate, infrastructure, energy and power, and merchant banking. Two major companies employ these investment strategies: Goldman Sachs Capital Partners and The Carlyle Group.

In a leveraged buyout, private equity, as a financial asset, is used in a business transaction to acquire the assets from the shareholders of the company. A financial sponsor agrees to the acquisition, but doesn’t advance the required capital to fund the acquisition. Instead, the financial sponsor raises debt for the acquisition. The debt used to finance the transaction is predicated on several key factors: the financial state of the acquiring company; the lender’s willingness to grant credit to the financial sponsor for the company to be acquired; and the interest expenses of the debt.

In a venture capital transaction, private equity financing is used to provide capital to new and innovative technology companies to fund development. Capital is afforded to companies that lack long-term management experience and that also lack the funding to cover operating expenses. Financing is typically structured to be distributed in development stages. For example, funding may be distributed for start-up business expenses until the new company generates revenue. Another stage of funding might be distributed after the company demonstrates an ability to show profit.

In a growth capital transaction, companies use private equity to invest capital into businesses that need funding for long-term growth planning. A growth planning program might require investment funds to expand operations globally, to acquire like businesses, to compete in new markets, and to restructure the corporate system internally. In this type of transaction, the owner of the company sells a share of the business in order to generate cash for subsequent financing ventures; reduces debt on the balance sheet; and retains majority ownership.

In addition to the most common forms, private equity investors employ riskier strategies such as targeting real estate as an asset to fund leveraged buyouts. They also invest in bridges, transportation, and public works projects; energy production; distribution and sale of power; and merchant banking negotiated investment instruments. Private equity companies also invest in existing assets called secondary investments. Investment companies may exercise one or two options: sell their interests in private equity funds and/or purchase the investments from existing investors.

Goldman Sachs is a private equity firm. It functions as the investment agent of Goldman Sachs. It provides leveraged buyout and growth capital investments. Financial and business transactions range from approximately $200 million to under $800 million. It offers a unique private equity product: the Goldman Sachs Asset Management (GSAM). The GSAM is an investment solution that helps institutions, companies, and individuals manage risk.

The Carlyle Group is also a private equity firm with a global presence within seventy-one countries. As an investment firm, it manages approximately $80 billion of equity capital and it also focuses on leveraged buyouts and growth capital within the following industries: energy, health care, technology, transportation, and telecommunications.

The Carlyle Group focuses most of its investment strategies in the United States and Europe. Current portfolio investment holdings include an equity share in Dunkin’ Donuts, Hertz rental car company, United Defense Industries, Synagro Technologies, Inc, and Insight Communications.

The company focuses on a unique investment approach through its real estate division, Carlyle Realty Partners. Through the division, The Carlyle Group invests within office, retail, and industrial markets. They target “undervalued properties” in United States markets and real estate divestitures in European sectors. European markets include France and Germany. Carlyle Asia Real Estate Partners acquires properties in Japan and other major Asian countries.