Summary Public vs. Private Equity

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Summary - Public vs. Private Equity

  • 1 Introduction

  • What is important when comparing capital raised?
    Who provides it
    How much
  • 2 Public Equity

  • What is bigger, PE or Public Equity?
    Public much bigger
  • What do many executives believe about being public?
    It provides financial flexibility and credibility in eyes customers, suppliers & employees
  • What are the disadvantages of raising equity in public market?
    Can be high costs
    Intermediaries: auditors, atterneys etc. 3-5%
    Stock price can drop 3 - 10%
      - Lose a lot of $$ compared to what you get in offerering
  • Why stock price drop when raising equity in public market?
    Investors think:
    Raise E, not debt: management could think firm overvalued
    Firm may really need funds
  • Explain what happens when there is a discount on equity
    Negative spiral down: Inv. think should be even lower
  • Paradox public capital
    Most available when not needed (good times)
    Not available when needed (bad times)
  • 3 Private Equity

  • What is private equity compensation different from public equity compensation?
    Compensation tied directly to success investments
  • Compensation PE
    Management fee 1-3%
    20% on gains
  • Compensation public equity
    Fixed fee of AUM
    Growing asset base = more income
    Less sensitive to performance than PE
  • Which kind of asset class is public equity but looks like PE?
    Hedge funds look like PE
  • 4 Value adding investors

  • Returns PE
    Over time about same as public mkts
    Trackrecord PE's much higher than without
  • Differences in predicting returns of PE and public equity
    PE can show outperformance in long run due to better managment
    Past = predictor future
  • Why PE returns more different among each other than Public Equity?
    More skill needed in less liquid & less efficient mkts
    Variation this skillset among PE's is big
  • "PIPES"
    Private Investment in Public Equity Securities
  • What do PIPES do?
    Company sell shares first to PE investors at discount to compensate for expertise
  • How do PE investors believe they add value?
    1. Liquidity /availability
    2. Information
    3. Incentives mgmt
    4. Governance
    5. Business skills

    1. Liquidity / availability regardless of market
    2. Information based investment model
    3. Greater incentives for management
    4. Superior governance structure
    5. Complementary business skills
  • 4.1 Liquidity/availability regardless of market conditions

  • Explain liquidity / availability regardless of MKT conditions?
    PE often countercyclical
    In illiquid markets
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