Sarah sobieski | The Basics Of Private Equity

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Long-term investing to build stronger, more competitive companies.

PRIVATE EQUITY: THE BASICS

WHAT IS PRIVATE EQUITY?

By definition, private equity is an asset class in which financial buyers purchase stakes in companies that are not publicly traded.

But in reality, private equity is much more…

PRIVATE EQUITY IS…

A source of capital for companies in need.

PRIVATE EQUITY IS…

A key driver of economic growth and innovation.

PRIVATE EQUITY IS…

A job creator and employer of millions of

Americans across the country.

PRIVATE EQUITY IS…

A steady source of income for its investors

such as public and private pension funds, university

endowments and charitable foundations.

HOW PRIVATE EQUITY WORKS

Private equity firms seek out underperforming or undervalued companies.

By working with these companies managers unlock significant value by:

• improving business strategy

• injecting managerial expertise

• advancing production technology

• expanding distribution

The essence of private equity is the alignment of interests between management and business owners. This structure supports long-term planning without constant pressure of delivering quarterly results to public shareholders focused on short-term results.

There is one shared objective: increasing company value. Together, management and owners make business decisions to achieve this goal.

THE PRIVATE EQUITY ADVANTAGE

Private equity funds are typically structured as partnerships:

Portfolio Company 2

Portfolio Company 1 Portfolio Company 3

Private Equity Fund(Limited Partnership)

Private Equity Fund

Manager (GP)

Limited Partner

Investors (LP)

THE PRIVATE EQUITY MODEL

Private equity firms generally invest in companies for several years or more. The goal — in every case — is to work with management to improve the company’s performance and make it a stronger, more competitive enterprise.

PRIVATE EQUITY IS A LONG-TERM INVESTMENT

The private equity industry…

• Includes more than 2,400 U.S. based private equity firms, and 3,400 worldwide.

• Invests more than $1.6 trillion in 15,200 U.S. based companies over the last ten years.

• Sponsors companies that employ more than 8 million workers worldwide.

BASIC INDUSTRY FACTS

WHO INVESTS IN PRIVATE EQUITY?

Pension funds are the largest investors in private equity.

(based on capital invested in 2010)

WHO BENEFITS FROM PRIVATE EQUITY?

Limited partner investors receive the lion’s share of returns generated by private equity.

Original Investment - $10 billion

Profit - $4.3 billion

Profit - $15.6 billion

Limited Partner Investors Private Equity Fund Managers

Returns from $10 billion fund assuming a 3x multiple

PRIVATE EQUITY PROVIDES SUPERIOR RETURNS

Private equity investing provides outsized returns to help investors meet their retirement, educational and charitable goals.

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77.78.49.19.8

10-Year Annualized Return

Private equity-backed companies increase their net earnings through:

revenue growth (40% of gains)

cost reductions (30%)

acquisitions (20%)

Private equity transactions have yielded as much as

$15 billion in additional output at manufacturing firms.

CREATING VALUE

Private equity-backed companies that went public have outperformed their competitors and the markets.

IMPROVING COMPETITIVENESS

Productivity at private equity-backed companies grows 2 percentage points faster than at their competitors.

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Average Return in 2010

Private equity invests in a wide variety of industries. Since the start of the Great Recession, private equity has invested almost $8.6 billion in 59 bankrupt companies.

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12Deal Value (Mil.) Number of Deals

AIDING ECONOMIC RECOVERYPrivate equity is a source of financing during periods of tight credit.