Hello and welcome to our private equity primer where we’ll be walking you through the What, Why and How of private equity. I’m Katie Robinette, and I’m Mark Wilkerson, and throughout this video series we will discussing the private equity landscape and how it has evolved over time, why we think it’s an attractive investment opportunity today, and how to get the best results as an investor in the asset class.
What are we talking about when we say private equity. Confusing Term because it is used to describe very different types of investment strategies such as the leveraged buyout, venture capital and distressed debt investing.
But, there is a common thread across private equity and that is the Limited Partnership structure. The Limited Partnerships structure is how investors access Private Equity. Investors = LPs, PE Manager = GP, Together commit capital to a Fund. GP has 5 years to pick investments and another 5 years to sell them hopefully at a profit. The LP structure has been around for around 30 years and is what made Private Equity an investable asset class.
In subsequent videos we will describe various types of private equity investments but today we’ll start with the concept of the leveraged buyout – a strategy that accounts for a vast majority of the dollars dedicated to the asset class.
If you buy a house for $1 million using all cash and you sell it for $2 million, you make 2x your investment.
If you buy a house for $1 million using 20% cash and borrow the rest, and then you sell it for $2 million, you make about 6x your investment after you pay back your loan. Of course you have to consider the interest costs and that will depend on several factors – but you get the point… the return on your investment is magnified when you use debt to finance your purchase. And that is the concept behind a leveraged buyout of a company.
In the next episode we will discuss the events that shaped the rise of the leveraged buyout in the 1980’s.