ShmoopTube

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Finance a la shmoop what is private equity?

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

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

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

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

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

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

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

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

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

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

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their money well structurally what makes a private

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equity deal private instead of public well private companies are typically

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

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

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

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

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

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

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

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

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

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

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

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well the other type of private

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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