Funds: Private Equity, Hedge and All Core Structures

Chapter 5

Investment-specific Strategies

5.1 INTRODUCTION

This chapter focuses on the principal investment strategies for alternative assets in order to place the structuring, legal and tax reviews described earlier in this book into context.

5.2 PRIVATE EQUITY/VENTURE CAPITAL

5.2.1 Introduction

Private equity is a general term for investments made into companies which are either unlisted private entities, listed entities with the intention of delisting the target company or those that behave more like a private equity-backed business (for example a buy-and-build strategy). The aim of private equity investment is to in some way restructure or redirect the target business which results in an increase in the value of the business, which can then be sold on to the profit of the investors, typically within three to five years of its acquisition or investment.

5.2.2 Strategies

There are various strategies deployed by private equity investors or funds in order to maximize their gains.

(a) Buy-out

The most common is the leveraged buy-out (LBO) by which investment is made combining private capital with debt financing. The rationale is the classic justification for leveraging or gearing, that once the fixed cost of debt borrowing is paid for by the returns, the remaining capital gains from an investment are pure profit for the investors. The greater the ratio of debt to equity, the greater the return for the equity investors (in theory). LBO deals are more common when acquiring larger and ...