Private equity is a distinct asset class among alternative investments. It has grown rapidly over the last fourteen years, with annual global commitments increasing from US$17 billion in 1990 to over US$300 billion in 2006*.

Historically, the growth in this asset class has been driven by the ability of top performing private equity firms to generate returns that significantly outperform comparative quoted markets over the medium to long term. In addition, private equity has the potential to improve diversification given its historic low correlation with public indices.

Private equity is a generic term for investments in private companies (or public companies where the investment has the character of a private equity transaction). The term “private equity” can broadly be broken down into the following categories:

• Venture Capital;
• Development Capital;
• Buy-Outs/Buy-Ins (though further sub-sets exist).

Venture capital is often used to describe the private equity sector as a whole, but more accurately describes investments made at an early stage in a company’s life.

Development capital is financing provided for the growth or expansion of a company that is breaking even or trading profitably.

Buy-Outs/Buy-Ins are used to refer to different structures in private equity that are applied to established businesses with revenue and profit streams. Private equity managers provide funds to enable current operating management to acquire an existing business or to enable a manager or group of managers from outside a company to buy into the company.

In time, these investments are generally realised either through a listing on a stock exchange, recapitalisation or by way of a trade sale.

* Source: Private Equity Analyst, European Venture Capital Association, Asian Venture Capital Journal.