Private-Equity Investing

What they are, who is doing them, and how you can profit from themnn Innovation and entrepreneurship need more than creativity and hard work in order to change the world. There are many hurdles to overcome as new businessmen try to take their idea out of their head and into the marketplace. One of the most powerful ways to move a business from the stages of conceptualization to actualization is private equity investing. It is one the biggest and fastest growing industries in the world. Everyone is touched by the effects of private equity investing, yet the industry is only getting bigger and more proficient with age.nnWhat is Private Equity Investingnn Private Equity Investing is an asset class consisting of ownership (equity) in firms that are not (at least currently) traded publicly. There are three different classifications for private equity investing:n Venture Capital - Typically refers to investments in early-stage or start-up companies. Example: A college student looking for money to start an online networking website.nGrowth Capital - Investments in more mature companies looking to expand without giving up a large, or majority stake in the company. Example: Facebook looking for additional capital in order to purchase software that will supplement their existing site.n Leveraged Buy-Out (LBO) - investors using cash to leverage even larger sums of money in order to purchase an existing company from the original creators and present shareholders. The goal of such a buyout is often to merge two companies customers, expertise, and intellectual property, or to buy-out competitors before they become too powerful. Example: Google offering Facebook a billion dollars to buy the company from the creators.nnSize of Industrynn Referred to as the “miracle of Wall Street” by Bloomberg: equity investing stands to be one of the most positively potent impacts to the global economy. The Wall Street Journal has been cited as saying that the returns from private equity investments triple the S & P 500 every year. The United States has $1.3 trillion dollars worth of private equity investments in play at this very moment. That number is nearly equal to 10% of the national debt. $365 Billion dollars were invested globally in 2006 alone. This number is over three times that of the previous year. North America accounts for 60% of the worlds private equity investments. n The majority of the money spent in this industry goes towards buy-outs. From 2000 to 2006 buy-outs increased their share of total private investment expenditures from 20% to 80%. There were 188 total buyouts in 2006, ten of which are referred to as “mega buy-outs” accounting for $101 billion.nnTrends in the Inner Workings of Private Equity InvestmentsnnTypically, private equity investments work like this:n-Rich person gives money to fund managern-Fund manager invests in a number of privately owned companiesn-Companies go into a portfolio and earn money for the individual investors in any number of waysnn The majority of Berkshire Hathaway’s (Warren Buffet’s company) investment capital has been transfered to private equity investments. In 2006 his company raked in $16.9 billion using these type of investments as the cornerstone of their business plan. While addressing his stockholders in 2006 Buffet said “In our early years we put most of our retained earnings and insurance float into investments in marketable securities. Over the years, however, we have focused more and more on the acquisition of operating businesses [private companies].” nnHow Investors Profit From a Professionally Managed Private Equity PortfolionnUtilize one, some, or all of the companies cash to leverage a loan. Use the money from the loan to buy more companies, or buying-out the remaining percentages of the companies in the portfolio not currently owned by the holding firm. nDividends can be dispersed from profits.nInvestors have more than money. They have a wealth of connections, knowledge, and mentor power that can be given to the portfolio firms with the intent of strengthening their investments power, longevity, and risk mitigation. This is the premise behind business incubation.nEmploy an exit strategy and get out. Sell the company in the public sector or to another private equity holding company, liquidate assets, etc. nnAngel Investingnn Another popular form of private equity investing is through angels. An angel in this case is referring to a private citizen that takes his/her personal net worth and uses it to buy a percentage ownership in a company that either they found, or that found them. This includes the friends and family of the entrepreneur. Typically angel investing is one of the first rounds of financing that a start-up business receives. The reason is that angels (more often then not) have the ability to look past a couple of red flags before the entrepreneur has the ability to build their credibility. Although profiting is always going to be a big facet of an angel’s lure, these type of investors often have ulterior motives. Such motives often include socially responsible investing, the drive to see young entrepreneurs succeed, or they just want to spend their money on exciting and dynamic entities. Whatever their purpose, angel investors drive this economy, and many become extremely wealthy in the process. nnConclusionnn Private equity investing is an industry that fuels the entire economy. Without out it, millions of businesses would never have made it to their first sale. These investors are finding cures for diseases, solving everyday household problems, and helping entrepreneurs accomplish their goals. They are doing so while risking great sums of cash with the intent of making more in profit. These investors are spending their money with a purpose, to drive business, solve problems, and change the world. nnWorks Citednn"An Introduction to Private Equity." The British Venture Capital Association. 2005. nn"Private Equity Investments." Investment U. 12 Jun. 2008.