Private Equity
TASK 1
The statement by Henry Kravis that private equity was in its “golden era” might sound like hubris to the unacquainted observer but may actually not be far off from the reality given the growth of private equity funds under management since the advent of large-scale leveraged buy-outs (LBOs) in the 1980s. Henry Kravis as a principal partner in Kohlberg, Kravis & Roberts (KKR) pioneered LBOs in the late 1970s and KKR has been a major private equity firm since having reportedly invested in over 160 companies since 1977 (KKR website, 2009). Henry Kravis spoke on the back of unprecedented record funds raised by private equity firms in 2006. According to the Dow Jones Private Equity Analyst newsletter of January 2007, U.S private equity firms raised $255 billion in 404 funds followed by $302 billion in 415 funds in 2007. In 2007 U.S private equity firms raised this money in the middle of the turmoil of the credit crisis which was just beginning to shake financial markets worldwide.
Private equity as an asset class has always been attractive due to the higher returns as compared to public equity. Many studies have confirmed that private equity investments have consistently outperformed public equity markets. For instance, according to research flash paper released in January 2012 by the firm Partners Group, “since 2000, private equity investments have outperformed public equity indices by 5% in North America and 9% in Europe per annum, in the aftermath of the burst of the internet bubble (Q2 2000 to Q1 2003) private equity investments outperformed public markets by 6% in North America and 20% in Europe on a annualized basis and during the financial crisis from Q3 2007 to Q1 2009 private equity investments beat public market indices by 19% in both North America and Europe on an annualized basis”.
For further illustration, Exhibit 1.1 below also shows the private equity investment levels in North America from around 2001 to 2007.
From the background set above
The statement by Henry Kravis that private equity was in its “golden era” might sound like hubris to the unacquainted observer but may actually not be far off from the reality given the growth of private equity funds under management since the advent of large-scale leveraged buy-outs (LBOs) in the 1980s. Henry Kravis as a principal partner in Kohlberg, Kravis & Roberts (KKR) pioneered LBOs in the late 1970s and KKR has been a major private equity firm since having reportedly invested in over 160 companies since 1977 (KKR website, 2009). Henry Kravis spoke on the back of unprecedented record funds raised by private equity firms in 2006. According to the Dow Jones Private Equity Analyst newsletter of January 2007, U.S private equity firms raised $255 billion in 404 funds followed by $302 billion in 415 funds in 2007. In 2007 U.S private equity firms raised this money in the middle of the turmoil of the credit crisis which was just beginning to shake financial markets worldwide.
Private equity as an asset class has always been attractive due to the higher returns as compared to public equity. Many studies have confirmed that private equity investments have consistently outperformed public equity markets. For instance, according to research flash paper released in January 2012 by the firm Partners Group, “since 2000, private equity investments have outperformed public equity indices by 5% in North America and 9% in Europe per annum, in the aftermath of the burst of the internet bubble (Q2 2000 to Q1 2003) private equity investments outperformed public markets by 6% in North America and 20% in Europe on a annualized basis and during the financial crisis from Q3 2007 to Q1 2009 private equity investments beat public market indices by 19% in both North America and Europe on an annualized basis”.
For further illustration, Exhibit 1.1 below also shows the private equity investment levels in North America from around 2001 to 2007.
From the background set above
References: Baker, M. and Wurgler, J. (2002) “Market Timing and Capital Structure” Journal of Finance. Vol. 57 (1): 1-32. Bradley, M. G and Kim, E. H. (1984) “On the existence of an optimal capital structure: Theory and Evidence” Journal of Finance. Vol (39): 857-877. Brealey, R, A., Myers, S, C and Franklin, A. (2011) Principles of Corporate Finance. 10th Edition. McGraw-Hill. Fama, E. F. (1991). “Efficient capital markets II” The Journal of Finance. Vol (46): 1575-1617. Harris, M. and A. Raviv. (1991) “The theory of capital structure” Journal of Finance. Vol (46): 297–355. Barnes, P. (2007). “Minsky’s financial instability hypothesis, information asymmetry and accounting information: the UK financial crises of 1866 and 1987” Accounting History. Vol (12): 29-53.