Post on 06-Apr-2018
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Private equity and asset
allocation
Submitted by:
Mitakshara Sharma
Keertika Bhatt
Rahul Kumar
Dheeraj Sharma
Deepica Garg
Sursh Kumar Swami
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PrivatePrivate equity,equity, inin finance,finance, isis anan assetasset classclass
consistingconsisting ofof equityequity securitiessecurities inin operatingoperating
companiescompanies thatthat areare notnot publiclypublicly tradedtraded onon
aa stockstock exchangeexchange..
Private equity
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Investment Generally made by:Investment Generally made by:Private Equity FirmPrivate Equity FirmVenture CapitalVenture CapitalAngel InvestorAngel Investor
Providing Working Capital To A TargetProviding Working Capital To A TargetCompany To:Company To:
nurture expansionnurture expansionnew product developmentnew product developmentrestructuring of the companys operations,restructuring of the companys operations,management, or ownership.management, or ownership.
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Leveraged BuyoutsLeveraged Buyouts
Venture CapitalVenture Capital
Growth CapitalGrowth Capital
Distressed InvestmentsDistressed Investments
Mezzanine CapitalMezzanine Capital
Common investmentCommon investment
strategiesstrategies
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AA strategystrategy ofof investmentsinvestments wherewhere aa companycompany isis acquiredacquired fromfromthethe currentcurrent shareholdersshareholders withwith thethe useuse ofof financialfinancial leverageleverage..
FinancialFinancial sponsorsponsor doesn'tdoesn't commitcommit wholewhole capitalcapital..
SponsorSponsor willwill raiseraise nonnon--recourserecourse acquisitionacquisition debtdebt..
TheThe sponsorsponsor isis benefittedbenefitted inin twotwo waysways::
Leveraged buyoutsLeveraged buyouts
(1) the investor itself only needs to provide a(1) the investor itself only needs to provide a
fraction of the capitalfraction of the capital for the acquisitionfor the acquisition
(2) the returns to the investor will be enhanced(2) the returns to the investor will be enhanced
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TheThe amountamount ofof debtdebt usedused toto financefinance aa transactiontransactionvariesvaries accordingaccording toto::
(1)(1)thethe financialfinancial conditioncondition andand historyhistory ofof thethe
acquisitionacquisition targettarget
(2)(2) marketmarket conditionsconditions
(3)(3)thethe willingnesswillingness ofof lenderslenders toto extendextend
creditcredit (both(both toto thethe
LBO'sLBO's financialfinancial sponsorssponsors andand thethe companycompany toto
bebe acquired)acquired)
(1)(1)thethe abilityability ofof thethe companycompany toto covercover thosethose
costscosts..
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InvestmentsInvestments mademade inin lessless maturemature companies,companies, forfor thethe launch,launch,
earlyearly development,development, oror expansionexpansion ofof aa businessbusiness..
IfIf nono sufficientsufficient fundsfunds toto financefinance projects,projects, thenthen mustmust seekseek
outsideoutside financingfinancing..
VentureVenture capitalistscapitalists getget significantsignificant controlcontrol overover companycompany
decisions,decisions, andand aa significantsignificant portionportion ofof thethe company'scompany'sownershipownership..
VentureVenture capitalistscapitalists areare expectedexpected toto nurturenurture thethe companiescompanies inin
whichwhich theythey investinvest..
Venture capitalVenture capital
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ThereThere areare typicallytypically sixsix stagesstages of of ventureventure
roundround financingfinancing::(1)(1)SeedSeed MoneyMoney:: LowLow levellevel financingfinancing neededneeded toto
proveprove aa newnew idea,idea, oftenoften providedprovided byby angelangel
investorsinvestors.. CrowdCrowd fundingfunding isis alsoalso emergingemerging asas ananoptionoption forfor seedseed fundingfunding..
(2)(2)StartStart--upup:: EarlyEarly stagestage firmsfirms thatthat needneed fundingfunding
forfor expensesexpenses associatedassociated withwith marketingmarketing andandproductproduct developmentdevelopment..
(3)(3)FirstFirst--RoundRound :: EarlyEarly salessales andand manufacturingmanufacturing
fundsfunds..
--
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AnAn investmentinvestment (generally(generally minorityminority
investment)investment) inin relativelyrelatively maturemature
companiescompanies thatthat areare lookinglooking forfor
capitalcapital toto expandexpand oror restructurerestructureoperations,operations, enterenter newnew marketsmarkets oror
financefinance aa significantsignificant acquisitionacquisition
withoutwithout aa changechange ofof controlcontrol ofof thethe
businessbusiness..
Growth capital
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InvestmentsInvestments inin financiallyfinancially
stressedstressed companiescompanies..
TwoTwo broadbroad subsub--strategiesstrategies::
((11)) "Distressed"Distressed--toto--Control"Control" oror
"Loan"Loan--toto--Own"Own" strategiesstrategies --investorinvestor providesprovides seniorsenior debtdebt securitiessecurities..
--cancan influenceinfluence restructuringrestructuring..
-- cancan participateparticipate inin anan auctionauction ofof thethe companyscompanys
assetsassets
22 "S ecial"S ecial Situations"Situations" oror
Distressed and Special SituationsDistressed and Special Situations
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Refers toRefers to subordinatedsubordinateddebtdebt oror preferred equitypreferred equity securities.securities.
Often used by smaller companies.Often used by smaller companies.
Allows such companies to borrowAllows such companies to borrowadditional capital beyond the levelsadditional capital beyond the levels
that traditional lenders are willingthat traditional lenders are willing
to provide.to provide.
Mezzanine capitalMezzanine capital
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Real estateReal estate
InfrastructureInfrastructure
Energy and PowerEnergy and Power
Merchant BankingMerchant Banking
Fund of FundsFund of Funds
Other strategiesOther strategies
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Asset Allocation
Asset allocation is an investment strategy thatattempts to balance risk versus return by adjusting thepercentage of each asset in an investment portfolio
according to the investors risk tolerance, goals andinvestment time frame.
Asset allocation is based on the principle that differentassets perform differently in different market and
economic conditions.
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WHY ASSET ALLOCATION
IS REQUIRED?
Different asset classes offer returns thatare not perfectly correlated, hence
diversification reduces the overall risk interms of the variability of returns for agiven level of expected return.
To generate adequate returns to meet thefinancial goals at desired level of risk.
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ASSET CLASSES
The process of allocating money between equity stocksand fixed income securities such as bonds and fixeddeposits is called asset classes.
Division::
Equities
Bonds
Mutual funds
Real estates
Commodities(gold/silver)
Antiques/arts
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Asset Allocation
Strategies
Strategic asset allocation
Tactical asset allocation
Drifting asset allocation
Balanced asset allocation
Dynamic(insured) asset allocation
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STRATEGIC ASSET
ALLOCATION
The primary goal of a strategic assetallocation is to create an asset mix that
will provide the optimal balance betweenexpected risk and return for a long-terminvestment horizon.
2 APPROACHES UNDER THIS::INFORMAL APPROACH
FORMAL APPROACH
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Tactical asset allocation
Used to develop short-term strategies to exploit changes in marketconditions
method in which an investor takes a more active approach that
tries to position a portfolio into those assets, sectors, or individualstocks that show the most potential for gains.
Enhancement in the performance of the portfolio through anopportunistic shift in the asset mix in response to changing patternsof reward in the capital market.
Value oriented approach-as it considers earnings yeid and yeild tomaturity
Contrarian in nature as it involves buying on market decline andselling on market rise.
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DRIFTING ASSET
ALLOCATION
BUY AND HOLD policy.
Irrespective of what happens to relative
values, no rebalancing is done.
Initial portfolio be left undisturbed.
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BALANCED ASSET
ALLOCATION
Periodical rebalancing of the portfolio to ensure that thestock bond mix is in line with the long term normal mix.
This policy calls for maintaining an exposure to stocksthat is constant proportion of portfolio value.
if the desired constant mix of stocks and bond is say50:50 , this policy calls for rebalancing the portfoliowhen relative values of its components change,so that
the target positiones are maintained. Unlike the buy and hold policy its do something
policy.
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Insured asset allocation
Used to develop short-term strategies to exploit changes ininvestors objectives and constraints
This is a portfolio insurance strategy.
Involves shifting the asset mix mechanistically in response tochanging market conditions.
For ex:: the fund manager may follow a constant proportion portfolioinsurance (CPPI) policy
CPPI POLICY::INVESTMENT IN STOCKS=m(portfolio value floor)
Where m is greater then 1
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Which Allocation Strategy is Best?
Define $ invested in stocks (S)
S= m(A - F)
where A=
total asset value F = floor value for assets
m = multiplier
B = $ invested in riskless bonds (=A-S)
Three Strategies (A=100):
Buy and Hold (m=1, F=40)
Constant Mix (m=.6, F=0)
Portfolio Insurance (m=2, F=70)