Some Reflections on Private Equity: Trends, Valuation, and Challenges

Abstract

Private Equity or PE has been hailed as one of the most significant sources of capital for enterprises (private in particular) in order to expand business activities both in terms of scale of operations and scope of activities. Unlike Venture Capital (VC) funds, PE funds focus more predominantly on middle-sized businesses that demonstrate enormous potential for growth and expansion. As the major shareholders of PE funds seek to earn attractive rates of return on their investment, it becomes imperative for these funds to be very selective in picking most suitable candidates for investment. The business model of a typical PE fund revolves around taking a strategic stake in the target firm, which is complemented with a representation in the board in the form of a directorial position. PE funds envisage bringing about operational and structural changes in the target firm with an ultimate eye on enhancing the value of the firm. Typical investment horizons for PE funds vary between 5 to 10 years with popular modes of exit being: Public floatation of stock (as in IPOs), Management buyouts, and