Financial Intermediaries Exist Purely Because of Information Asymmetries and Agency Conflicts
Private equity is usually medium to long-term finance provided in return for an equity stake in potential high growth unquoted companies. These equity investments include securities that are not listed on a public exchange and are not easily accessible to most individuals [1]. There are usually available only to high net worth individual 's, corporation 's, institutional clients etc. These investments range from initial capital in start-up enterprises to leveraged buyouts of fully grown-up corporations. Mostly Private Equity funds are structured as closed-end funds with a finite life span of 10 or 12 years, which may be extended with the consent of the majority of the shareholders (Gompers and Lerner, 1999). Although they are illiquid and possibly more risky than publicly traded investments, when employed consistently as fraction of a larger balanced portfolio, they can offer higher returns than traditional public equity investments.
According to "Lerner et al. (2004) and Gompers and Lerner (2002)" Private Equity funds are typically structured as limited liability partnerships in which a specialized Private Equity firm serves as the general partner (GP) and institutional investors or high-net-worth individuals provide the majority of capital as limited partners (LP). The GP undertakes investments of various types (e.g. venture capital, bridge financing, expansion capital, leveraged buyouts), with the obligation to liquidate all investments and return the proceeds to the investors by the end of the fund 's life.
Summary of private equity characteristics:
High risk asset class As private equity market is not transparent, as there is little publicly available information. So investing in private equity is riskier than investing in other publicly traded firms. The risks and illiquidity of investments are compensated for by a higher expected return. [2]
Long-term time horizon An engagement in private equity is usually long term investment with usual life
According to "Lerner et al. (2004) and Gompers and Lerner (2002)" Private Equity funds are typically structured as limited liability partnerships in which a specialized Private Equity firm serves as the general partner (GP) and institutional investors or high-net-worth individuals provide the majority of capital as limited partners (LP). The GP undertakes investments of various types (e.g. venture capital, bridge financing, expansion capital, leveraged buyouts), with the obligation to liquidate all investments and return the proceeds to the investors by the end of the fund 's life.
Summary of private equity characteristics:
High risk asset class As private equity market is not transparent, as there is little publicly available information. So investing in private equity is riskier than investing in other publicly traded firms. The risks and illiquidity of investments are compensated for by a higher expected return. [2]
Long-term time horizon An engagement in private equity is usually long term investment with usual life
References: [3] Matt Krantz, USA Today " Private Equity Firms Spin Off Cash" [4] House of Commons, Treasury Committee - Private equity -Tenth Report of Session (2006–07), Volume I [7] Cotter, J. and S. Peck,( 2001) "The structure of debt and active equity investors: The case of the buyout specialist" Journal of Financial Economics 59, 101-147.