Private equity is an investment class that encompasses all types of equity investment into unlisted businesses and other special situations where the investment has the character of a private equity transaction. Unlisted businesses generally require access to investment capital to fund growth or to provide liquidity for existing shareholders. More specifically, unlisted companies may require private equity to expand or grow an established business either organically or by acquisition, to facilitate existing management to buy out an existing owner, to facilitate new management to buy into a business, or to allow existing shareholders to make a partial or full sell down of their holdings.
Compared to investments in listed companies, private equity investments are relatively illiquid, offer potentially higher returns and, being unlisted, do not exhibit daily volatility in value as listed companies do. Private equity funds can negotiate the terms of their investment based on detailed company information and access to key management. The investment manager can also become actively involved in the strategy of the investee company through board representation, thereby increasing shareholder value.
In periods of weaker economic conditions are likely to be private equity investment opportunities. Private companies are likely to raise equity to fund growth and for working capital needs. These factors combined, may lead to greater private equity investment opportunities, with less competitive pressure on investment valuations. Also, businesses with private equity backing and strong balance sheets will be well placed to capitalise on investment opportunities to strengthen their competitive positions.
Private equity is able to perform detailed due diligence on investment targets, influence management and a company’s strategic direction, and provide the company with finance and resources for growth. Management usually has an equity stake in private equity backed companies which is intended to strongly align their interests with private equity investors.
The private company market in New Zealand offers a broader reflection of New Zealand’s economy than the listed market. The unlisted business sector is also more diverse in terms of size, stage of development and the industries they operate in. There are approximately 4,700* private companies in New Zealand with annual revenue between $10m and $100m. (*Statistics NZ)
Private equity is becoming an increasingly important asset class for investors. Allocations of 5%-10% in institutional portfolios are commonplace
Increased portfolio diversification and a low correlation between private equity and other asset class returns reduces overall portfolio risk for an investor.
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