CFA Level I Alternative Investments - Private Equity Strategies

[Music] private-equity generally means investing in privately owned companies or in public companies with the intent to take them private private equities are usually categorized according to their investment strategy they include leveraged buyouts venture capital development capital and distressed investing leveraged buyout funds acquire established private companies or publicly listed companies with a significant percentage of the purchase price financed through debt if the target is a publicly listed company it is taken private after the buyout there are two key criteria for a leveraged buyout to work firstly the target firm should have the potential for increase in value through some combination of management incentives restructuring cost reduction or revenue enhancement two types of LBOs are management buyouts in which the existing management team is involved in the acquisition and will stay to implement the value add measures and management by inn's in which an external management team will replace the existing management team to implement the value add measures on the target firm the second criteria is debt managing to work out a highly leveraged purchase if debt financing is unavailable or costly LBOs are less likely to occur the assets of the target company typically serve as the collateral for the debt and the cash flows of the target company are expected to be sufficient to service the debt if the buyout goes through the debt becomes part of the capital structure of the target company the debt financing can be a combination of bank loans high-yield bonds and mezzanine financing bank debt also known in this case as leveraged loans often carry covenants intended to protect the lenders the covenants may require the target company to maintain specified financial ratios within certain limits submit information so that the bank can monitor performance or operate within certain parameters the covenants may restrict the company from further borrowing or impose limits on paying dividends or making operating decisions similarly bond terms may include covenants intended to protect the bondholders in spite of the covenants the bonds are usually rated as high-yield bonds due to the high leverage employed the bonds must therefore offer high coupons to attract investors mezzanine financing refers to debt or preferred shares that carry warrants or conversion features that give investors participation in equity value increases warrants give the lender the right to purchase new stocks at a certain price while the convertibility allows the lender to convert the debt into common stock in addition to interest or dividends this type of financing offers a potential return based on increases in the value of common equity leveraged loans are generally senior secured debt and the bonds are unsecured in the case of bankruptcy mezzanine debt are subordinate to both senior and high-yield debt so they typically offer the highest yield amongst the three another very common classification of private equity is venture capital venture capital funds invest in companies in the early stages of their development the investment often is in the form of equity but can be in convertible preferred shares or convertible debt while the risk of failure is high returns on successful companies can be very high this is often the case when the company has grown to the point where it can be sold to the public via an IPO the companies in which a venture capital fund is invested are referred to as its portfolio companies venture capital fund managers are closely involved in the development of portfolio companies often sitting on their boards or filling key management roles categorization of venture capital investments is based on the company's stage of development terminology used to identify venture firm investment at different stages of the company's life includes the following the formative stage refers to investments major in a firm's earliest period and comprises three distinct phases angel investing is capital provided at the idea stage funds may be used to transform the idea into a business plan and to assess market potential the amount of financing at this stage is typically small and provided by individuals rather than by venture capital funds seed stage financing refers to investments made for product development marketing and market research this is typically the stage during which venture capital funds make initial investments through ordinary or convertible preferred shares early stage financing is provided to companies moving toward operation but before commercial production and sales have occurred the investments are made to fund the initial production costs and sales expenses later stage refers to the stage where a company already has production and sales and is operating as a commercial entity investment funds provided at this stage are typically used for expansion of production and increasing sales through an expanded marketing campaign mezzanine stage financing refers to capital provided to an established company to prepare it for an IPO it is the bridge between the expanding company and becoming a public listed company development capital also called minority equity investing earns profits from funding business growth or restructuring many times minority equity investing is initiated and sought by management of companies who are interested in realizing earnings from selling a portion of their shares before they're able to go public although this scenario occurs most commonly with private companies some publicly listed companies also seek this form of private equity capital such financing is referred to as private investment in public equities distressed investing by a private equity firm typically involves purchasing the debt of troubled companies like those that are potentially or currently in default or in bankruptcy proceedings distressed debt investors sometimes referred to as vulture investors often take an active role in the management and direction of the company or in the reorganization of the company the return on investment is a function of the ability of the investor to restructure the company back to profitability and these are the for more corn categories of private equity you're watching an excerpt from our comprehensive and animation library for more videos like these head on down to prep Nuggets comm let's prep Nuggets let us do the hard work for you

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Keywords: CFA Level 1, CFA Level I, Alternative Investments, CFA Prep Course, CFA Prep Provider, CFA Lesson, CFA Tutorial, CFA Video

Id: EbCmZ1UTJTE

Length: 7min 31sec (451 seconds)

Published: Thu Feb 13 2020