Private Equity: Taking a Company Off the Market

Pension funds are one of the institutional investors that are part of the buyside.  Because of their long term view, they have invested in private equity and hedge funds - two vehicles that have varying lockup periods.  According to www.preqin.com, more pension funds (from 5.1% in October 2008 to 6.3% in December 2010 of US and Canadian funds) are investing more (from 5.7% to 7.5% of their asset under management) in private equity.  According to one article, private equity is replacing fixed income in portfolios.  I have even read that one pension is lowering its hedge fund exposure in favor of private equity (I am sorry that I cannot find that article.).

So, what is private equity?  It is an alternative investment in companies that do not have stock traded on an exchange.  The prime example in the news today is Facebook.  The main strategies are:

• Venture Capital - investing in start-up companies
• Leveraged Buyouts - buying an established public company and turning it into a private company
• Mezzanine Financing - combines private debt and equity investments
• Distressed Debt - investing in companies in financial stress

Since the credit crisis, private equity has struggled to raise funds.  In 2010, there was $225 billion raised.  In 2009, there was only $109 billion.  The high was $800 billion in 2007.