What is Inside Private Equity Business?
Private
equity business is wonderful business, or one can say its brain game, or I can
even say, let your excess money work for other and you also!, I have been developing applications for PE since
5-6 years. as a Software developer, I have developed different types of business intelligent reports, dashboards, SQL & ETL development for PE Client. as well as I have interest in Stocks and Equity investment,
5-6 years. as a Software developer, I have developed different types of business intelligent reports, dashboards, SQL & ETL development for PE Client. as well as I have interest in Stocks and Equity investment,
software
engineers or professionals who are working in PE domain they must understand
this domain, to give more productive output and grow faster in this industry. I
tried my best to put Private Equity domain more simple way to understand, even
for beginners. We will start from the basics first.
I have divided above article in 5 Topics for better understanding.
I have divided above article in 5 Topics for better understanding.
1) Equity Basics
2) Inside Private Equity business
3) Types of Private Equity
4) Fund Operation’s and Security Master
5) Well known examples, Deals of PE business.
I haven’t written more
elaborated descriptions, just to avoid confusion or bouncer balls! my theme is Small and easy to
understand.
------------------------------------------------------------------------------------------------------------------------Lets Start point to point.
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1) Equity Basics
- What is an Equity? First question, this is the first step we should know. We can say an Equity is the wealth of someone!
Let’s discuss some Basic points of Equity.
- Equity
- Legal Entity
- Share
- Share Capital
- Security
- Investor & Funds
- Bonds & Debentures
1) Equity = Asset Value – Liabilities
Example-
Asset (Flat 40L + Cash 5L + Car 5L) – Liability (Home Loan 30L + Car Loan 8) = +12Lakh is Equity of Person A.
Asset (Flat 40L + Cash 2L + Car 5L) – Liability (Home Loan 35L + Personal Loan 5 +Car Loan 8) = -1Lakh is Equity of Person B.
Asset (800cr) – Liability (300cr) = 500Cr is an Equity of K Company.
2) Now what is Legal Entity? – It’s a company or a legal body.
3) Share Capital – Share is a divided equity in a Legal Entity, and Share capital is the total amount raised by the company in sale of shares.
Now we understood Share Capital, but to raise that capital from investors we should give back something trusted contract or government paper or something Security, right?
4) What is Security - A security, in a financial context, its a certificate or other financial instrument that has a monetary value, and can be traded. Securities are generally classified as equity securities, such as stocks. and debt securities, such as bonds and debentures.
5) And who buys all this? an Investor -The investors are those who gives money, in return of some security, like shares, bonds, Funds. (Funds could be an amount collected for special investment purpose)
6) Bonds – bonds are fixed payable contract between investor and Legal Entity. It’s a Security, investors pays money against bonds security.
7) Debentures – are a long term security with fixed rate of interest earning issued by a company.
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Now will go further inside of Private Equity business...
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2) What is Inside Private Equity Business?
- a Term private equity is very broadly classified and customized, years on year however,
“Generally Private Equity is, any equity investment in a company which is not quoted on a stock exchange.” it’s a basic definition.
But we can define it some more ways. like,
Something publicly listed company is taken privately and unlisted,
Or buying big shares in Listed Company as part of portfolio,
Or Investment in Real estate project (IT parks, Housing Project, Road Bridge building Projects, SEZ),
Or the acquisition of other company,
Or the investment in startups (like Snap Deal, OYO, OLA, Swinggy, Byju’s),
Or investment in good but loss making company and convert it into profit making (like Flipkart, Paytm).
Till here we understood that PE business collect money from investors and Invest in different businesses, Shares, Buy a Company, gives loan. now we will see different ways of investments PE company does.
basically Investments are classified in 2 ways.
- a Term private equity is very broadly classified and customized, years on year however,
“Generally Private Equity is, any equity investment in a company which is not quoted on a stock exchange.” it’s a basic definition.
But we can define it some more ways. like,
Something publicly listed company is taken privately and unlisted,
Or buying big shares in Listed Company as part of portfolio,
Or Investment in Real estate project (IT parks, Housing Project, Road Bridge building Projects, SEZ),
Or the acquisition of other company,
Or the investment in startups (like Snap Deal, OYO, OLA, Swinggy, Byju’s),
Or investment in good but loss making company and convert it into profit making (like Flipkart, Paytm).
Till here we understood that PE business collect money from investors and Invest in different businesses, Shares, Buy a Company, gives loan. now we will see different ways of investments PE company does.
basically Investments are classified in 2 ways.
• Fund Investing – is something collecting money from multiple investors.
• Direct Investing - are those who manage this funds are also called GP who does Direct
Investing in multiple company buys shares etc., GP have full rights of investment and investment
strategies
• LP, GP, OP – are the partners, will understand the partners of company,
• LP (Limited Partner) are the investors who invest money in Fund.
• GP (General Partner) are the Fund managers, PE company.
• OP (Operational Partner) are those who operate funds of other big fund houses, are generally called as Hedge Funds.
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So far we got a definition of Private Equity and GP, LP, OP, but here is the question, what does PE company does with collected money? and how do they make money? are there any types? Lets see that...
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3) Types of Private Equity Business
Private equity funds generally fall into two categories.
Venture Capital and Buyout or Leveraged Buyout.
Venture Capital
“Venture Capital is nothing but providing capital to Startups new Ventures with unique business ideas”
Typically invest in small early stage and emerging businesses, that are expected to have high growth potential or have innovative Ideas, although venture capital funds carry risks from investing in unconfirmed emerging businesses, they can generate extraordinary returns or losses.
Buyout or a Leveraged Buyout
“Buyout is something majority share of the stock of the company is acquired”
Buyout - happens in large companies not in small startups which venture capital does,
Leveraged Buyout - A leveraged buyout is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition
Above two are types of Private Equity business, but I would like to add another area, kind of master type called as Hedge Fund.
Hedge Funds – are the fund collected from big players, or fund houses, or Institutional investors and follows route of either venture or Buyout investments.
Here are some basic differences of Buyout and Leveraged Buyout.
4) Fund Operations and Security Master.
The operational flow is as shown below.
1) Investors Invest money into Fund, (Vehicle) Then
--> Fund (Legal Entity) Legal Entity invest that money in --> Interesting Deals
--> Deals can have multiple Positions
--> Now Fund house pays money to Issuer (Seller)
--> for that Issuer gives back Security like Bonds, Property Papers, Shares.
--> all above business Transaction will captured for Audit.
I have a detailed diagram to illustrate the entire process below, link above flow with diagram to understand in details.
“Venture Capital is nothing but providing capital to Startups new Ventures with unique business ideas”
Typically invest in small early stage and emerging businesses, that are expected to have high growth potential or have innovative Ideas, although venture capital funds carry risks from investing in unconfirmed emerging businesses, they can generate extraordinary returns or losses.
Buyout or a Leveraged Buyout
“Buyout is something majority share of the stock of the company is acquired”
Buyout - happens in large companies not in small startups which venture capital does,
Leveraged Buyout - A leveraged buyout is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition
Above two are types of Private Equity business, but I would like to add another area, kind of master type called as Hedge Fund.
Hedge Funds – are the fund collected from big players, or fund houses, or Institutional investors and follows route of either venture or Buyout investments.
Here are some basic differences of Buyout and Leveraged Buyout.
| Venture Capital | Buyout or Leveraged Buyout |
| Small enterprise, Young companies, even start-up | Large or very large enterprise, not startups |
| Bank debt almost never used | Bank debt almost always used |
| Converts startups to bigger profitable company | Increases the profit of company by reducing debts |
| Exit by selling company | Exit by selling Equity |
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As of now we have learned many things in PE business, from basics to the types of PE business and partners, now we will go some more deep in Operations, how does the operations happen in PE.
This is more interesting subject for Software Engineers who program PE needs, develop software for PE, designs Database, ETL and reports....
This is more interesting subject for Software Engineers who program PE needs, develop software for PE, designs Database, ETL and reports....
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4) Fund Operations and Security Master.
1) Investors Invest money into Fund, (Vehicle) Then
--> Fund (Legal Entity) Legal Entity invest that money in --> Interesting Deals
--> Deals can have multiple Positions
--> Now Fund house pays money to Issuer (Seller)
--> for that Issuer gives back Security like Bonds, Property Papers, Shares.
--> all above business Transaction will captured for Audit.
I have a detailed diagram to illustrate the entire process below, link above flow with diagram to understand in details.
SunGard Investran is one of the popular software, now its FIS Investran.
Alternative popular application for Investran are
1) Juniper Square, 2) IMS (Investor Management Services), 3) Dynamo, 4) VTS, 5) Stessa, 6) CoStar Investment Analysis, 7) MRI Investment Management, 8) Lease Eagle
#Investran #JuniperSquare #IMS #Dynamo #VTS #Stessa #CoStarInvestmentAnalysis #MRI
#LeaseEagle
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This is what the Private Equity business, i have tried to cover maximum topics in this article with minimum words. however, without knowing best examples one cannot understand PE very well,
lets see some of the popular PE deals....
lets see some of the popular PE deals....
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5) Well known Deals of PE business
Most of us knows these deals but unaware that it’s a PE deal.
1) Venture Capital Deals Example - Paytm, Future Retail, Flipkart
Soft bank, worlds one of the biggest Private Equity Firm, India Deals.
Blackstone’s Leveraged Buyout / Buyout Deals of taking over of bad Loans
