Actuarial news and views from Cape Town and beyond

Private Equity Investment

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I thought it would be interesting to consider private equity investment as this is not covered in any detail in most courses.

Private equity investment was defined in the KPMG private equity survey as “shareholder capital invested in private companies, as distinguished from publicly listed companies. Private equity funds are generally investment vehicles that invest primarily in enterprises which are not listed on a public stock exchange.”

Investment in private equity has grown over the past few years as can be seen in the graph below (taken from the KPMG private equity survey.) It is thought that the market for private equity will continue to grow as the government improves support structures and technology encouraging the growth of privately owned firms.

Private equity investment

Private equity has been viewed as an investment medium for individuals who have a high net worth and are looking for higher returns than can be found in the general market. Private equity is characterised by high risk due to lack of information, complexity, high costs and lack of liquidity. Due to the higher risk involved investors expect higher returns. However results at the end of 2013 suggest that performance is not as good as expected with much higher returns over a 10 year period leading up to 2013 than returns observed more recently as can be seen in the graph below taken from Weitz Botes’ opinion piece

Private equity returns compared to listed comaniesPrivate equity investment generally occurs through investment in a private equity fund where the fund places investments in a number of private companies over a number of years. The fund will call for additional investments when it identifies new opportunities. The fund may also have undrawn funds at the end of the review year which they have not managed to invest in a suitable firm. These funds will be returned to investors.

Private equity investments are generally not very liquidity due to the fact that they are not traded on an open market. Returns are realised through Trade sales (the sale of a private company to another company through cash or shares), IPOs (registration as a public company where shares are issued to current investors) and recapitalisation (cash distribution to shareholders)

For further information please refer to the opinion piece by Weitz Botes and the KPMG private equity survey:


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