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Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests + Website, 2nd Edition by Robert T. Slee

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CHAPTER 24

Private Equity

The term “private equity investors” refers to the various individuals and organizations that provide equity capital to private companies. Chapter 23 focused on three early-stage equity investors: business owners, angels, and venture capitalists. The term “private equity,” for our purposes here, refers to institutional entities that mainly provide capital to mainly later-stage companies. This chapter describes several private equity sources: private equity groups (PEGs), hedge funds, and family offices.

In the last 20 years, an organized assemblage of equity providers to companies with revenues in the range of $0 to $1 billion has emerged. Currently, thousands of equity capital providers offer hundreds of billions of capital to private companies. Given the effect of leverage, this investment potential has had an impact on the private equity market several orders of magnitude larger.

Private equity traces its roots to federal government regulations, tax laws, and security laws. For example, the U.S. Department of Labor modified the “prudent man” provision of the Employment Retirement Income Security Act in 1979–1980 to allow regulated pension funds to be invested in private businesses. Increased investment began flowing through the legal structure of limited partnerships, whose investment activities are regulated or governed by their own charters. Those charters typically both prescribe and proscribe the types of investment activities that the limited partners ...

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