What is private equity? – MoneyWeek Investment Tutorials

in this video I want to take on an important topic within financial markets private equity this will be an introduction to the topic and if you'd like to know a bit more do let us know at the end of the video now private equity it's one of those buzzwords that's banded around and quite a few people have asked me what does it actually mean so clearly is a little bit of confusion and hopefully in this video I'll cover the basics as to what private equity firms actually do they're certainly big enough the top five firms globally raised something like 150 billion dollars worth of capital over the last five years and names such as Blackstone KKR Carlyle Group TPG are the kind of big players in that space so what are they all up to on what are other private equity firms up to that's the topic I'm gonna cover today now private equity is basically a way as it sounds of raising equity privately so private equity investors tend to be looking to buy shares alone in certain types of firms which I'll cover in a moment and they tend to be private companies although they don't have to be so it is private equity capital that's being supplied now there are three basic categories of private equity investment routes if you like Union divides a little bit on this but in my opinion there's about three routes first of all you've got what's called venture capital this all comes under the primary umbrella venture capitalists are firms that basically specialize in investing in small private startups typically high-risk ok requiring sort of what's sometimes called seed funding to get going and expand all right so these are companies that are off the radar they're not publicly traded you and I can't buy shares in them and they're looking at venture capitalists to come in those venture capitalists will supply equity and they look potentially to cash in later the company goes from being private to public all right in the meantime they'll look potentially to take a seat or seats on the main board and have quite a say in how the business grows and develops all right so essentially the sort of goal there is to move firms from private its private ownership into the public sector and typically then cash out their stake and move on into the next company that requires investment good example those people you want to sort of name in this space would be the likes of say a 3i now the second sort of private equity area is providing what I'd call growth capital for existing potentially quite large quite public firms so sometimes companies will look around at the options for growing and expanding they're looking for something which is potentially relatively cheap and will achieve their aims and they'll bring in a private equity firm is the kind of experts if you like because private equity firms claim to be good not only providing growth capital but also providing sort of expertise management expertise now they claim to be able to supply experienced professionals who can help the firm grow so sometimes you'll find that they're involved in bringing capital into an existing firm that may be already quite large it may be a listed plc for example that's looking for extra money and takes it from one of these big private capital firms and perhaps the one that makes the headlines the most often is the what's often known as the leveraged buyout that's a pretty broad category anyone who's read the famous book barbarians at the gate all right when primary phone call KKR got involved in the LBO leveraged buyout of RJR nabisco will have some idea about what's involved here but this is private equity firms sometimes coming in with a lot of money and saying basically what we can do is gobble up a firm so here you might be taking a pop blick firm private almost the opposite of this root over here taking a public phone private and what they're looking to do is to gobble it up make improvements and then often reverse the process later so they'll spotter our sort of target buy it off its existing shareholders okay look to make operational improvements and then sometimes sell it back to the market at a higher price so if you like as almost going the public private public if you don't see it that way now how do they do that and what's justification over here you get all the headlines generated from once quite critical you know how do you do that I mean how do you improve the way that a public company is being run by taking it into private hands as a private equity firm well what they claim to be able to do is to bring in better management operational improvements make changes that these big stodgy public companies have failed to make over the years okay in truth this can be quite controversial because in truth although some of the better private equity houses almost certainly do bring in improvements changes in the way the firm is managed operated over here some private IP phones have been accused of simply cost-cutting literally slashing costs the loan which short-term will boost performance firing staff downsizing and so on selling off non-essential assets and on top of that funding what they've just bought with a mountain of cheap debt finance okay and that's another little trick all right gearing as it's called and I cover in another video allows you potentially to take a firm stuff it from the debt okay make a few operational improvements cheap quick ones I say cheap quick and easy ones like cost-cutting and so on and then get rid of it again at a higher price and during the boom years here before the financial crisis quite a few private equity firms were accused doing exactly that riding the boom in cheap debt taking out the sort of fast costs and cashing in later and at the expense of all sorts of stakeholders including employees former shareholders and so on so they have it essentially three ways that private equity firms can get involved in companies now who are these private equity firms are just a couple of colorpoints I mean you know where they come from if you like well typically they're they're run by X so-called experts from various walks of industry X CEOs okay X investors and so on and in terms of how the probability firms themselves are financed whether they raise the capital from to be able to go out and sort of gobble up other public companies for example comes from one or two sources typically all come from institutional investors such as pension funds of life insurance companies and/or it'll come from whoever ultimately owns the private equity house because some of them are owned by big organizations such as some of the big investment banks Goldman Sachs for example all right and what about you I mean there's always action going on there are firms sucking in venture capital growth capital okay going through the LBO process potentially so how do you the private investigator involved in all this was two or three routes in there are one or two listed private equity firms around three I mentioned earlier on for example so sometimes you'll find you can buy a share in a listed private equity company so a company that specializes in doing this kind of stuff another common routine is a fund all right we should have spread your investment across different types of private equity if you like perhaps down at the venture capital end and there's actually a vehicle called a venture capital trust in this country it's the UK that enables private investors to get into the venture capital space I might do more on that in another video if I get to request for it and throw on to other roots there is for example exchange-traded fund out there LSE I PRV is the code and that one attempts to track the listed private equity firms in the S&P 500 that's the u.s. index okay so it's not a desperately easy sector for a private retail investor to play you know private equity firms are not looking to you and I to provide them with a sort of the capital a needing at 105 a billion dollars I mentioned earlier didn't come from the likes you and I came from elsewhere but there are one or two ways in for a retail investor if you want to get some sort of exposure to private equity as for the are they good or bad all depends on who you're talking about okay some of the top firms undoubtedly bring in expertise the small startups and existing large firms simply don't have so they do offer genuine improvement but the accusation in the run-up the flanger crisis was that they were joined by lots and lots of slightly more Mickey Mouse outfits who just looked to make a quick buck by loading up their target firms with cheap debt finance so there you have it if you'd like to know more about this topic that was a very basic introduction do let us know you

49 Replies to “What is private equity? – MoneyWeek Investment Tutorials”

  1. My CAT Decided What I ATE for 24 HOURS (And This Is What Happended…)

  2. Is it me or we just found the best finance teacher on YouTube?! Thanks for making the difficult subject dumb proof!

  3. How would the average investor’ invest in such companies as 3i. Are there any such companies in the US? Thank you.

  4. “Operational improvements like cost cutting” this guy is an idiot, plain and simple. Speaking with deliberate vagueness in sound bites that lead you nowhere. Define “cost cutting” you pencil neck. Rarely does cost cutting improve anything in a company and is why that’s the LAST thing businesses do when trying to dig themselves out of a hole.

  5. how do private equity funds underwrite and calculate every investment? meaning, what exactly are the sheets or instruments they use to calculate IRR, Equity Multiples, Cash flows, and overall underwrite and project for every fund?

  6. Private equity investments will be reinvented with blockchain. Something like Muirfield IP is utilizing blockchain technology to do exactly this.

  7. in people republic of china it call CITIC securities , hutong Securities , ICBC int, Communication bank of China int ,

    in japan it call UFJ /Nomura / mizuho securities,

    in South korea it call KB bank , hana bank , dont forget

    Union bank of Switzerland and Credit Suisse SA, Julius Baer S.A. , also

    The Deutsche bank and commz bank is huge as well ,

    in italy, it call Union Credit

    In Russia it call Siberian bank / Ruff bank

    The 30 yrs state bond , the treasury bond , the levage buyout , the Pension funds deals is a must

    when the tax player protesting Wall street// La Defence /Financial district 1% control 99%

    We would as the actually is 0.000001 % control 99.99999%% wealth

    When the tax player see a SLUM/ high crime rate area , We demostrion them and build a Villa , maison , hotel restore

    When the tax player see a desert , We see the petrol and oil / nature resource

    When the unskilled Worker/rural countryside farmer flooding to mega city to seeking a high pay job

    We relocated and further investment plan to non development country , uncivil conflict area for seeking short time high return rate investment chance

    When the taxpayer come to the office locate in mega skycrapter

    We would never said that is a grambling VIP table LLC.

    We are Recycling environment protection charity Donation multinational corporation

    in 4:21 we would said that the Vietnam cong party , WZK party of North korea , The Syria mil , the pakistan islam Grp ,the afghanistan, the mongolia Hans is barbarians invasion,P.S. we don't deal with those grp with proxy

    We are just Peace keeper


  8. Would love it if you would do a case study on Sears and how Eddie Lampert took a potential great opportunity to compete with Amazon and flushed it down the toilet with his mis-management and poor restructuring

  9. Private equity is key in starting many business ventures, however it is not required! I think bootstrapping is also a great way to get a business off the ground!
    𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐋𝐢𝐭𝐞𝐫𝐚𝐜𝐲 𝐅𝐨𝐫 𝐌𝐢𝐥𝐥𝐞𝐧𝐧𝐢𝐚𝐥𝐬 𝐂𝐡𝐚𝐧𝐧𝐞𝐥
    𝐒𝐮𝐛𝐬𝐜𝐫𝐢𝐛𝐞𝐫 𝐆𝐨𝐚𝐥 𝟏𝟗𝟎/𝟐𝟎𝟎

  10. This was great, I have been researching "mispricing" for a while now, and I think this has helped. Have you ever come across – Genubrey Mispriced Infiltration – (just google it ) ? Ive heard some incredible things about it and my brother in law got great success with it.

  11. TIW Private Equity has a dominant presence in National and Internation events over years. TIWPE's Partners are sought out speakers in the Private Equity space. Below are few events which had TIW Private Equity's presence

    1. Startovation 2017


    3. SuperInvestor Asia 2014

    4. Howdy Ventures Launch

    5. AVCJ Japan 2015

    6. AVCJ USA 2014

    7. GTECH Leaders Meet 2017

    8. Kerala Startup Mission 2017

  12. I love your videos, easy and informative. Please provide other elaborative video on how PE firms make money. Thanks

  13. The Investor looks for Safety, good return, Exit route inaddition to business Model.
    We should address and convince on these points. Then only we can get PE Fund for investment

  14. Tim Bennet,
    I am interested in gathering more brainstorming information in the stream line of private equity.
    Look forward to receiving more up coming active intetest.

    Sherman Peters

  15. Tim, I really enjoy the videos, but can you please take away the 20 seconds of silly introduction? I much preferred the old videos which got straight to the point.

  16. I want to know everything, especially those operational changes one  can make to a underperforming company And how I can start a private equity firm in South Africa.

  17. Taking a company public is a relatively rare exit strategy for VC.  Most of the time it's some sort of M&A.

  18. Dude, you're providing great information, but your delivery needs some improvement. This video could barely keep my attention beyond 1:51. Instead of using the monotone speech add some volume and expression to your tutorials. Keep up the good work!

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