Managed Money

Finance a la shmoop what is private equity?

well there's public equity that's this stuff companies who IPO'd

they're listed on NASDAQ and the New York Stock Exchange and the London Stock [London stock exchange building appears]

Exchange and a bunch of others so if that's all the public equity you know

equities anyone can invest in... i.e open to the public see the catchy name there

then what's private equity hmm well it's private in part because not just anyone

can invest in it in most cases investors have to be "accredited" to

be able to invest in private equity and that just means that they've signed [Person signs document]

letters stating that they are big boys and girls and understand that there is a

whole lot of risk in what they are investing in and if you're out house

cleaner business dies well then they won't sue the managers for losing all [Man drops window cleaning product]

their money well structurally what makes a private

equity deal private instead of public well private companies are typically

much smaller than public ones their needs for capital are much lower so they

only need to tap a select group of usually wealthy investors rather than

massive pools of capital available in the public markets there are generally

two types of private equity in real life practice the first is what's called

growth equity which is really just late stage venture capital rounds put into [Growth equity explained on 100 dollar bill]

companies a relatively short time before an expected liquidity event ie an IPO in

a growth capital deal a high-growth tech company might be raising 50 million

dollars at a 250 million dollar pre-money valuation believing it can go

public for five hundred million dollars in two years later well this type of PE

deal is just a standard equity investment buying a good sized sliver of [Person places pie on floor]

ownership pie in you know outhouse cleansers dot-com...

well the other type of private

equity deal structure is one form or another of a leveraged buyout that is in

the second type of private equity deal the target for the buyout is usually a [Stock value rising on company stock value chart]

company who used to be good but then fell you know like that so a private

equity firm might buy old crappy purses.com for two billion dollars putting in

five hundred million of equity from their own coffers but then borrowing one

and a half billion bucks from kindly loving banks well the hope or belief

then is that the PE firm by leveraging geniuses they court to help them fix [Man holding bunch of flowers to woman]

broken companies like this one will be able to turn that purse frown upside

down add some cool tech to it like biometric purse opening and GPS tracking [People place biometric and GPS devices on a purse]

and how about heated handle things how about that that's tech

right and then three years after having taken the company private like it used

to be public they lever up, bought it took it private then they fixed it well

then the PE firm hopes to take it public again for four billion dollars turning

their 500 million equity stake into a value of some two and a half billion

dollars after paying back the one one and a half billion dollars in loans or

plus interest and all that that they took out to buy it in the first place

right to make five times your money in just a few years that's a really good

deal in reality it's financially a whole lot more complicated than this but well [Man with maths formulas floating in the background]

no more complicated than this purse has become.....