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By M. Isi Eromosele
Investors participate in private capital markets for two main
reasons: they pursue increased investment return and portfolio diversification.
Private capital provides investors with the opportunity to
pursue higher long-term returns and greater diversification than are available
through public securities markets alone.
Private capital investments can be diversified by investment
strategy, stage of development, vintage year (the year when a fund is raised or
its first investment is made), industry, manager and geographic location.
There are three traditional sectors of private capital - venture
capital, private equity and distressed capital, as well as natural resources (which
is sometimes classified along with real assets and/or other inflation-protection
investments).
Venture Capital
Venture Capital consists of investments in start-up and early-stage,
high-growth private companies, principally in information technology and life
sciences. Today venture capital is practiced around the world with the main
centers of activity being certain well-established locations in the U.S.
like Silicon Valley ; more recently, venture capital is
practiced in China ,
India , Israel
and other parts of Asia and Europe .
The venture capitalist usually owns a minority stake in the
company, but is actively involved with entrepreneurs over a period of years to
develop strategy, recruit management, secure financing and set up customer or
other strategic relationships with larger companies.
The main investment objective is to earn returns above those
generally available in the public securities markets, achieved through long-term
capital appreciation.
Private Equity comprises investments in existing companies, most
with positive cash flow or profit. Some private equity managers acquire a
majority equity stake or buy the entire company, frequently utilizing financial
leverage to do so, via transactions such as leveraged buyouts, management
buyouts, recapitalizations, reorganizations, privatizations, restructurings and
spin-offs.
Managers focusing on growth equity will typically
concentrate on companies with high growth (with positive cash flow) and may use
little to no financial leverage. They will often purchase a significant
monetary stake with important governance rights. Returns are often driven by
the potential for rapid growth.
The private equity opportunity set is global, including not
only developed markets like the U.S.
and the European Union but also emerging markets and other rapidly developing
economies. Investors seek higher returns over longer periods of time than those
usually available on international public securities exchanges.
While private equity investments made in developed economies
outside the U.S.
are similar to U.S.
standards in both practice and return, those investments made in emerging
markets can be more volatile. In addition, when investing outside of one’s home
country, currency impact must be considered.
Distressed Capital
Distressed Capital is often considered a subset of private equity
and generally involves identifying problem companies or troubled assets which
managers believe can be significantly improved by implementing turnaround
tactics and/or restructuring to unlock underlying value.
These companies or assets exist in varying degrees of
distress, may already be in default, and may or may not be under bankruptcy
protection. In the case of companies, investors may commit new capital in the
form of debt or equity and often try to influence the process by which the
issuer restructures its debt, hones its focus or implements a plan to turn around
its operations.
Some investors will look for “non-control” investments, some
of which are asset purchases (e.g., pools of bank loans, structured securities,
trade claims, bankruptcy claims, etc.), where they do not seek control to
benefit from restructuring or resolution of the distressed nature of the
underlying asset, albeit still play an active role in approach to value creation
and realization.
Natural Resources
Natural Resources include investments in oil- and natural
gas-related companies and properties, as well as investments in alternative
energy and in power-related companies. Underlying company investments can be made
in more local currencies with the fund manager overseeing currency risk at that
level.
Other natural resources related areas include minerals, mining,
timber, agriculture and water. These investments offer the potential for
enhanced return, powerful portfolio diversification and a hedge against
inflation.
Related Investment Areas - Other investment
strategies that lend themselves to private investing are mezzanine financing
and private equity real estate.
M. Isi Eromosele is
the President | Chief Executive Officer | Executive Creative Director of Oseme
Group - Oseme Creative | Oseme Consulting | Oseme Finance
Copyright Control ©
2012 Oseme Group
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