Hedge funds and Private Equity - PES

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Specific economic function of Venture capital: Venture capital investment involves risks, as
capital is invested in new technologies and/or, unproven business strategies. Venture capital
investment fosters innovation by financing young companies with innovative concepts and generates
high-skilled jobs. Venture capital investment creates new employment and new wealth. The
venture capital industry represents a transmission channel of privately available capital into
sectors of the economy that have no access to the public capital markets.
Specific economic function of Expansion capital: Expansion stage investment involves in some
ways less risk than venture capital, because investments are made in existing, generally profitable,
companies. Expansion capital can provide capital for new premises, plant and equipment
and product or service development needed for growth and in addition support the internationalisation
process and the adoption of advanced governance and management skills.
Specific economic function of Buy-out capital: Buy-out investment involves less risks for the
management companies and investors as investment is made in mature established companies
where there is the possibility to create value, mainly through reorganising of businesses or
restructuring operations. In the best cases, this is effectively what is taking place, where for
example buy-outs help solving corporate succession situations or finance ownership transfers.
But buyout capital looks mainly for significant stable cash flows, for example in the infrastructure
based as their investors are looking for a stable long term return with regular dividends and
reduced market risk.
In general, management companies do not invest in all segments. Most specialise in an industry
or type of investment. They are also differentiated by the value of assets managed, which affects
the size of their transactions and defines the profile of the targeted companies. Certain private
equity investors have specialized in major shareholder transactions while others have focused
on smaller investments to build a big portfolio of minority investments.
LBOs are investing in a wide range of industries. The analysis is based on full consideration of
the cash flow opportunities on an industry-by-industry basis in the manufacturing sector and in
consumer goods and services.
The LBOs buy companies and delist them from the stock exchange. This has the advantage that
they do not have to inform the public about strategies, vital change etc. which are conducted in
the boardroom or in the CEO office. It is only the investors who stand behind the LBO fund,
who have access to this information while an eventual minority shareholder or the public are left
outside.
The lack of transparency is a huge problem in a democratic society. European labour unions from
all over Europe report examples of how LBO funds change the internal organisation and working
conditions of the companies. This group of stakeholders therefore wants to unlock the mystery
of the funds.
To build their portfolios, manager works at generating the cash flow corresponding to their investment
strategies. After completing the analysis process, complemented by prospective studies,
audits and negotiations, they choose the companies that offer the short-term outlooks that match
the objectives set out in the LBO fund.