CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 5

Private Equity Market Landscape

The growing interest in private equity (PE) investing has arisen in part as a result of its potential to earn superior long-term returns when compared to those of public equities and in part due to the diversification benefits it provides. Investments in PE funds offer access to privately held companies not available in the traditional investor landscape and to the expertise of intermediaries (the PE managers) in creating value by proactively influencing the management and operations of these companies.

Institutional investors typically focus on the organized PE market, where professional management is provided by intermediaries. There is also an informal PE market, which is composed of angel capital and is, not without justification, often referred to as family, friends, and fools. Companies can also receive funding from the founder's savings and efforts, commonly known as blood or sweat equity. The number of investments made in the informal PE market is probably several times larger than the number in the organized PE market; however, it is difficult for institutional investors to gain the information and access necessary to invest in this informal market effectively.

5.1 MAIN STRATEGIES

Private equity funds refer to a multitude of investment strategies with varying risk-return profiles (see Chapter 10) and liquidity profiles (see Chapter 14). The three primary, and most important, types of strategies are venture capital, buyout, and ...