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Private equity
Practical Law ANZ Glossary w-004-5324 (Approx. 3 pages)
Glossary
Private equity
A term denoting a range of transactions and, more broadly, an industry in which a managed investment fund (the private equity fund) or consortium acquires all of, or a controlling stake in, the equity securities of a target business, with significant leverage from bank finance and other sources of debt finance.
The term private equity refers to the fact that the investment strategy of private equity investors is typically dependent on the equity securities of the target business not being publicly traded on a securities exchange (such as the Australian Securities Exchange) after the acquisition, so that the private equity fund can operate the business without the compliance and reporting requirements applicable to publicly traded businesses.
Private equity funds promise attractive rates of return for their ultimate investors, who may be institutional investors, other funds or private individuals. The investing firm achieves this by:
- Increasing operational efficiencies in the business to drive earnings, growth and value.
- Providing a high degree of strategic direction and expertise to the business at the shareholder level, including by selecting and appointing a preferred board of directors and management team either from within the business or from elsewhere.
- Aligning the interests of the management team of the business with those of the private equity fund and its investors. Private equity transactions usually feature a highly structured management incentive scheme that offers key executives and employees securities or options in the target business or other bonuses upon achievement of certain performance targets and periods of service.
- Pursuing an exit strategy that will maximise the return on the private equity fund's investment in the business, typically by initial public offering or trade sale.
In Australia, the term private equity tends to refer to the sector of the investment industry engaged in leveraged buyouts featuring management incentive schemes. In the United States and other jurisdictions, the term can also refer to the venture capital investment and angel investment industries that invest capital in less mature businesses.