Drivers of Private Equity
Private equity in absolute terms is a means to invest
in a type of asset which is not generally publically traded and even if it is
public it is traded with the intent to make it private. Unlike other market
variables like stocks and bonds amongst other, private equity formation takes place in the form of assets which
are not liquid (companies).
By buying companies the private equity firms ensure an access to their revenues and assets
thereby having high return on their investment for the future. The transaction
of their firms is highly dependent on debt which is usually in the form of
high-yielding bonds. With the inclusion of debts to their finance acquisitions,
these firms ensure an increase to their financial returns.
This debt which has a fixed cost to it is a great way
to have high returns plainly because with the high return on this investment,
the profit is directly affected after the sale of these fixed cost debts.
Having understood
the way private equity works it is essential to understand what drives it:
-Raising Capital
What do you think
is a plausible reason for a company’s wish to sell its interest to a private equity firm? There can just be
several reasons for it-
2. To commence with the development process sooner that is especially true for time-sensitive industries.
-Growing
Regulation on Public Market
Owing to the
growing and rising regulation on public market the companies might just not be
very comfortable in this controlled environment and might just wish to stay
away from public markets. In a private equity type the companies can function
flexibly in absence of such control and rights.
-Its relative
effect on public market
Market analysts
believe that an increasing interest in private equities has led to benefit
various aspects of stock market.
Also a private
equity can give a boost to the stock price of a company when people tend to
believe that a buyout is likely.
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