Sunday, December 2, 2007

Private Equity - UBS

Private Equity
Active Strategies to Creat Value

Private equity funds are pools of actively-managed capital that invest primarily in private—but also public companies—with the intent of improving operations and adding value. The fund managers seek to create value in the companies in which they invest by improving operations, reducing costs, selling non-core assets and maximizing cash flow.

Private equity funds specialize by:

Strategy — venture capital, mezzanine, buyout, special situations
Industry — business services, retail, technology, et al
Geography — North America, Europe, Asia, et al
And, they create value by pursuing four primary strategies:

Valuation arbitrage — acquiring a sizable position in the stock of undervalued companies, with the intent of improving its fundamentals and maximizing shareholder value
Financial engineering — rearranging a company's capital structure to maximize equity value
Operational enhancement — improving a company's operating earnings and cash flow by making changes to its products or services and controlling costs.
Innovation — funding research and developing commercial applications for new discoveries, with the intent of introducing new products and concepts to the marketplace (usually applied by venture capitalists)
The Case for Private Equity
The potential benefits of private equity investing include:

A larger universe of companies in which to invest as some private equity managers invest in both public and private companies
Historic returns have exceeded those of publicly traded companies*
Low historic correlation with public equity and fixed income markets*
Private Equity
Putting the future into your portfolio

Private equity means investing in companies that are not listed on the stock markets. One exception is companies that have decided to de-list themselves, a process known as public to private.

Private equity calls for an investment horizon of at least 10 to 15 years. Investors should not expect any distributions in the first few years. It is only when the companies are sold again that investors will see returns.

More than with any other type of investment, the expertise and experience of the management team are vital elements that determine whether an investment will be successful or not. The difference in returns between those generated by the top quartile of such professionals and the average is striking. The ability to select the best managers and access their vehicles is crucial.

Private equity investments can generate above-average returns. Since they are mostly not listed on an exchange, they are not subject to the short-term fluctuations typical of the stock markets, and are thus suitable for diversification. Added to a portfolio, they typically improve its overall risk-return profile.

Private equity investments are illiquid and can lead to capital losses. Smart, professional diversification and the selection of the best fund managers can reduce these risks, however.

How do you go about investing in private equity?
Indirect forms of investment in private equity, where you delegate the choice of the individual firms to experts, make sense for the majority of investors. At UBS, investors need to have usually around CHF 5 million available for such investments.

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