Private equity transaction, formerly more commonly known as venture capital transactions, cover a variety of arrangements that have one common feature: the source of the money that is funding the transaction. This source is usually a fund established to invest specifically in unquoted securities (private equity) rather than in publicly quoted securities or government bonds.
Funds established to invest in private equity transactions obtain their money from a variety of sources, including institutions (such as pension funds, banks and insurance companies), companies, individuals and government agencies.
Private equity transactions themselves fall into three broad categories:
- Start-ups. This is the funding of businesses starting from scratch.
- Development capital. This is funding for already existing businesses to help them expand.
- Buyouts. This is the funding of purchases of businesses by management teams. It is this area of private equity funding that many people think of when talking about private equity and venture capital.
A buyout is the process whereby a management team, which may be the existing team or one assembled specifically for the purpose of the buyout, acquires a business (Target) from the current owners of Target using equity finance from a private equity provider and debt finance from financial institutions.
To achieve this, a group of new companies will be established (Newco group). A straightforward structure will consist of a top company (Newco), which will act as the investment vehicle for the investor, and a wholly-owned subsidiary of Newco (Newco 2), which will act as the purchasing and debt vehicle.
An even simpler structure involves just one new company being established to act as the investment, purchasing and debt vehicle.
Buyouts fall into one of the following categories:
- Management buyouts (MBOs) – where the existing management team buys out the business it manages.
- Management buy-ins (MBIs) – where a management team is assembled for the purposes of making the acquisition.
- Buy-in/management buyouts (BIMBOs) – a hybrid, combining an existing management team with an external management team.
- Institutional buyouts (IBOs) – where a private equity fund sets up a company to acquire a business and gives management a small stake either at the time of the buyout or after its completion.
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