PE: Quick facts
In the context of the recent reports on Abraaj Group and private equity industry, here are a few terms that are frequently used in our reports. Following are quick definitions and meanings of frequently used terms.
Private equity
Private equity is capital that is not listed on a public exchange. Private equity industry is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity.
Leveraged buyouts
A leveraged buyout (LBO) is the acquisition of a company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
Venture Capital
Venture capital is financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take just a monetary form; it can be provided in the form of technical or managerial expertise.
Angel Funds
Angel investors invest in small start-ups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. Angel investors are a class of well-to-do investors, usually experienced industry folk who take equity stakes in start-ups. They take very early-stage businesses under their wing. Typically, institutional investors such as venture capital funds or private equity funds do not like to commit capital to tiny businesses. Nor do they like to bet their shirt on firms that are yet to prove themselves in the marketplace. Angel investors literally step in where others fear to tread.
Limited Partners (LPs)
In the context of private equity, a limited partner (LP) is a third party investor in a private equity fund. Private equity firms raise private funds in general partnerships where they manage the capital as the general partner. Investors are then canvassed for investment commitments up to a specific allocation for the fund. The investors who commit and subsequently invest in the fund become limited partners of the general partnership.
General Partners (GPs)
In the context of private equity (PE), the general partner, or GP, refers to the PE firm that manages a private equity fund. These funds are usually set up as general partnerships with the third party investors being the limited partners and the PE firm acting as the GP. In addition to raising the funds and administering the daily operations of the fund, the GP is responsible for identifying and closing on investments, assisting the company management teams in maximising value, and liquidating investments so distributions can be made out of the partnership to the limited partners.