In an era where financial markets are in perpetual motion, private equity stands tall as a titan of investment.
The global private equity market is on an upward trajectory, with a projected CAGR exceeding 10%1. Total private market assets under management (AUM) reached $11.72 trillion as of June 30, 2022.
Private equity has become a sought-after asset class since the late 19th century. It creates jobs and fosters innovation by investing capital and expertise in companies. Understanding its components and strategies is crucial for financial success.
Let's explore the realm of private equity and principal investors and how they can benefit you.
Private equity is like a treasure chest for investors. It's an investment class that deals with money not found on the stock market. Imagine a mix of ingredients like growth capital, venture capital, leveraged buyouts, and mezzanine investments - that’s what private equity is made of.
In fact, the private equity firms have more than $1.23 trillion in dry powder (money ready to be invested) at their disposal as of May 2023.
Private equity is about long-term growth, not quick profits like buying and selling stocks. Principal investors are the big players who guide investments toward success.
Principal investors are entities that make strategic investments by deploying their capital into businesses or assets. Unlike someone who simply buys shares, principal investors are hands-on.
Principal investors are also very selective. They evaluate opportunities meticulously, considering market trends, company performance, and growth potential.
In the theatre of private equity, various key players take the stage. Let's look at the roles of portfolio companies, investors, and investment management firms.
A portfolio company is a privately held company that has received an investment from a private equity firm. Typically, this investment is made to help the company grow and increase its value.
For example, a private equity firm might invest in a technology startup to provide the funding, expertise, and guidance necessary to expand its operations, develop new products or services, or enter new markets.
They are the entities or individuals who provide the capital necessary for private equity funds. These investors are discerning and employ rigorous criteria to evaluate private equity opportunities. Routine investors in private equity include sovereign wealth funds, university endowments, and high-net-worth individuals.
They are crucial in the private equity ecosystem. They manage investments on behalf of investors, ensuring that the investments align with the client's financial goals and risk profiles.
For example, at Hewwest, we connect our investors with the right portfolio companies that fuel profitable returns to the investors’ portfolio, be it an individual, a corporate, a venture capital, or a family office.
Private equity investments offer several benefits, including the potential for high returns and portfolio diversification. By investing in private companies, investors will have access to the opportunities for significant capital appreciation and participation in the growth of promising businesses.
Private equity firms announced exits valued at a staggering $54.57 billion in the first quarter of 2023, showcasing how rigorously they circulate their money to make the most of investments.
Strategies define the return on investment because a suitable strategy can catapult an investment to success.
Let's dissect the key approaches that drive growth and value creation in private equity, from mergers and acquisitions to international expansion.
In March 2023, more than $628 billion in private equity deals were announced, compared to just $12 billion in January 2023. Mergers and acquisitions were most common among these deals.
By combining forces, companies can create synergies that drive growth and efficiency. A classic example is the acquisition of Heinz by Berkshire Hathaway and 3G Capital in 2013, which significantly saved costs and operational improvements.
LBO is a strategy for buying more with less, combining debt and equity to acquire companies. This strategy allows investors to amplify their returns by using the target company's assets and cash flows as collateral, potentially generating higher profits when the company is eventually sold or taken public.
Buying low and selling high is the essence of investing in distressed assets. These assets have hit a rough patch and are available at bargain prices. Private equity firms can turn these companies around and sell them for a profit.
It is like giving a company a financial makeover. It involves altering a company's capital structure, which is used to seize financial opportunities or fortify the balance sheet.
Having institutional investors is like having a financial guardian. They provide a stable source of capital and often have a long-term investment horizon which is particularly beneficial for private equity investments and often requires time to mature.
The buy-and-build strategy is akin to acquiring and building a foundation. Private equity firms acquire a company and then expand it through additional acquisitions. Audax Group is known for employing this strategy successfully across various investments.
Growth capital is another crucial strategy that helps companies expand operations, enter new markets, and ramp up marketing efforts simultaneously. Warburg Pincus's investment in Bharti Televentures in the early 2000s exemplifies a successful growth capital investment.
Expanding beyond borders can be a game-changer. Companies can tap into new customer bases and diversify revenue streams by entering international markets. Carlyle Group’s investment in Moncler exemplifies how international expansion can drive growth.
Add-on acquisitions involve adding new companies to an existing portfolio. This can create synergies, drive growth, and diversify revenue streams. For example, TransDigm Group has successfully used add-on acquisitions to expand its aerospace business.
Collaterals serve as a financial safety net in this domain. Essentially, collaterals are assets pledged by a borrower to secure an investment. If the borrower defaults, the lender has the legal right to seize the collateral.
In private equity, collaterals can range from assets to shares to guarantees. They provide investors additional security, ensuring there is something to fall back on in case things go south.
Hewwest is a formidable private equity player known for its astute investment strategies and client-centric approach.
Here is how Hewwest's services can catalyze your investment growth.
Still, wondering about your next step?