Private equity funds

What funds happen

Funds for investment objects are divided into universal and specialized (for example, investing only in the projects connected with information technologies).

By the size funds also significantly differ and can make from several million dollars to several billion.

Usually funds have in the portfolio from 5 to 15 investments of the comparable size. It allows to carry out the correct balanced diversification of an investment portfolio of fund.

Often several funds, creating so-called "families of funds" are under authority of management company. It allows is more complete to satisfy preferences of investors by the amount of investments, industry specialization, the investment horizon and other investment criteria.

Term of life of funds

The investment policy of funds predeterminates the term during which investments, stay term in one investment should be carried out. The average term of "life" of funds makes 5-7 years.

The term of finding of fund in a single investment usually is 3-5 years. Such term is optimal, allowing fund and to other shareholders of the company to hold necessary events for maximizing growth of its cost.

Why the companies to attract fund

Participation of Fund in the capital is, as a rule, limited to a minority share and makes 10-49%. At the same time the Fund is not a passive financial investor. The role of Fund – to become the professional financial partner of the existing shareholders and to maximize the cost of the company for the benefit of all participants.

The fund as the partner of key shareholders, introduces in portfolio company:

1. Experience and professionalism in the field of corporate finances:

• effective carrying out transactions M&A;
• attraction of debt financing;
• organization of successful private placements of the actions / IPO of the companies.

2. Experience of management and consultation of the medium-sized and large Russian companies concerning the development strategy, to implementation of the advanced business management systems and other elements of increase in operational efficiency of the companies;

3. Examination on creation of optimal legal structure of group and implementation of the standards of corporate management increasing financial and legal transparency of the company;

4. Broad contacts among the Russian and foreign investors and financial institutions that allows to attract additional debt and joint-stock financing on conditions, favorable for the company.

Private equity funds in Europe

In 2011 in the European market 83 exits from assets of private equity funds took place that became the greatest indicator about 2006 and 2007. Results of the annual research of the European market of direct investments conducted by Ernst & Young "Business development demonstrate to it: how do private equity funds create added value" (Branching out – How do private equity investors create value?).

In a research is considered at the expense of what private equity funds create added value, profitability of the companies with individual share of direct investment funds is analyzed. Results of a research show that for the last seven years of 87% of the realized investments brought to investors income. At the same time the gross income from investments of private equity funds exceeded income from comparable investments in stock exchange market by 3.6 times.

Sachin Deyt, the head of practice of consulting services of Ernst & Young for funds and the companies of direct investments in the countries of Europe, the Middle East, Africa and in India speaks: "Private equity funds managed to achieve increase in productivity for 6.9 percent a year in all European markets. Direct investments in capital stock stimulated creation of added value and increase in productivity in such countries as Great Britain, Ireland, France. Germany, Switzerland and Austria, providing at the same time employment growth".

In a research the conclusion about strengthening of provision of private equity funds is drawn. During 2011 growth of an exit of private equity funds from capital stock was observed that it was generally connected with return of the strategic investors who showed the greatest activity since 2005: their share of the specified market made 39% in 2011.

The quantity of exits of creditors (early repayment of a debt) was also reduced so direct investments in capital stock saved big profitability in comparison with the stock market. Despite distinctions of revenue breakdown, profitability and growth rates of performance in the different markets analyzed in the report, the main output is that the model of direct investments was applied with great success. A key to it is the choice of investment objects and stimulation of profitability of business.

Profitability of direct investments in the different industries

Direct investments in a segment of business services, retail trade and health care in which their amount the most considerable differ in the greatest profitability. In three specified areas growth of profitability and cost of an investment portfolio was above average values. Unlike it in the segments which are in big dependence on capital investments and consumer demand, for example: production of goods of private use and household goods, profitability was lower than average and approximately corresponded to profitability of the public companies working in these segments.

The segment of business services in which their rapid growth at the profitability exceeding an average value was observed was the most profitable to direct investments.

Harry Nicholson, partner of Ernst & Young LLP in consulting services to funds and companies of direct investments: "In this segment bargains below average cost are usually concluded, the investment portfolio in Great Britain differs in high concentration, creditors seldom [ahead of schedule] leave transactions".

Among the large industries the largest growth of an investment portfolio was observed in health care.

"This consequence of growth of the attractiveness of health care caused by aging of the population in the European countries, lack of pronounced recurrence in development of health care and perspectives of further growth of the private sector in many European countries", - Harry Nicholson says.

The high growth rate and the profitability exceeding an average value are partially caused by several large deals. The majority of other transactions in this industry small, and assets for sale were offered by private companies, joint-stock companies and private equity funds. The second in value sector in an investment portfolio is retail in which growth was provided generally due to the large deals made prior to credit crisis. A [early] exit of creditors occurs in this sector also infrequently that is one of the reasons for which the efficiency of the sector exceeds an average value. Together with it, an exit comes from projects less often than on average in the industries. Harry Nicholson continues: "We see that in the European countries of the company of direct investments strengthen industry specialization for the purpose of effective use of experience, increase in focus of activity and accumulation of professional knowledge. In many cases industry approach provides higher yield in comparison with universal approach".

Prospects

"Growth of quantity of exits from capital stock in 2011 – the positive phenomenon for funds and the companies of direct investments, in particular because in 2011 the activity of strategic investors, especially from the non-European countries increased. Last period of 2012 (first half of the year) looks so hopefully: strategic investors continue buying up of assets from investment portfolios of the companies of direct investments. The companies of direct investments should use the opportunity caused by growth of interest from investors from the USA and the Pacific Rim for the accelerated exit of their capital stock. Together with it, attraction to this work of strategic investors from the European countries looks is problematic", - Sachin Deyt sums up the result.