Private Equity and Venture Capital Assignment Sample

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1: Introduction: Private Equity and Venture Capital

The private equity industry has undergone a radical transformation in the last two years as several fundamental forces have convened to upset the status quo. Interest rates and inflation, geopolitical clashes, and environmental, social and governance (ESG) standards. All this has been very unfamiliar to some of the players. This is a point that Brain & Company pointed out in its recent observation of these changes, stating that in the context of private equity, the 24-month period up to the writing of this paper has been the most unique period.

Consequently, this report aims to identify some major trends that are in existence in the private equity market today in the area of fundraising, deal, valuations and exits. It also looks into micro and macro factors like inflation, the upward trend, monetary stringency and slow world growth affecting the sector. As a result, more private equity firms are shifting their strategies to focus on such factors as, overall portfolio resilience, value generation, and sustainable development.

Private Equity and Venture Capital Assignment Sample

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Based on this analysis, the report establishes a growth strategy as a possible way of contending with the current issues and exploiting chances. With Insight Partners XII focusing on technology startups, which has been identified as the market focus and investor interest to support technology platforms, the recommendation supports the alignment of market dynamics and risk and return objectives accurately. From this perspective, the fund gains support from strategic analysis based on detailed information about the fund itself and its performance.

2: The review of Private Equity market

The review of Private Equity will be determined in terms of types of equity and the factors of equity which are fundraising, deals, valuation, exits in the Private equity market. Expert insights from an Assignment Helper at Rapid Assignment Help UK can provide a clearer understanding of these core concepts and their practical applications.

2.1: Types of Private Equity

Private equity refers to all sorts of investment activities, with the two broad categories being Venture Capital and Buyouts or Leveraged Buyouts (LBOs). All these approaches are geared towards unique business development cycles and correspond to specific risk/ return ratios.

Figure 1: The Different Types Of Private Equity Funds

(Source: fastercapital.com, 2024)

Venture Capital (VC)

Venture Capital is deployed to young and unseasoned companies with earning prospects that are reasonably promising but unable to secure conventional financing. VC funds bring unique value to innovative start-ups as a source of much-needed early-stage capital for product development and scaling operations to capture value creating opportunities. There are still high-risk investments primarily due to the nature of the companies developing them, but the returns are huge if these ventures pay off. VC is most appealing to those investors who want to fund disruptive technologies and ideas, in particular (Metrick, and Yasuda, 2021).

Buyouts or Leveraged Buyouts (LBOs)

LBOs aim at acquiring mature business organisations, frequently acquiring majority control. LBO funds rely heavily on acquisition debt to fund the acquisitions and seek to increase the returns by application of a variety of other debt and operational changes. These investments are also fixed and cash flows are rational and thus when investors seek for lower risk investing compared to VC, such investments can suit them. LBOs are normally related to larger fund size and bigger experienced companies in several industries.

2.2: Fundraising in the private equity market

Private equity fundraising refers to the ability to seek capital from institutional players including pension funds, endowments or rich individuals. It is now less crowded and investors insist on seeing strong performances, strong value propositions, well-articulated strategies, and importantly, meeting ESG criteria. While risks remain high, under-deployed capital has reached near high levels in history thereby exerting pressure on the firms to redeploy the funds meaningfully. Sector specialisation and operational profit-making fundamental competencies are becoming more important, holding investors’ attention and motivating them to invest in private equity funds.

2.3: Deal Flow in the private equity market

Deal flow in the private equity market can be described as the quantity and quantity of deals in the market. In deal flow analysis, the two most important metrics used are the Number of Deals, and the Deal Sourcing Rate.

Number of Deals

The Number of Deals is the measure of how many potential investments are looked at more closely within a given timeframe, thus showing market activity.

Deal Sourcing Rate

The Opportunity Sourcing Profile determines the nature of the Deal Sourcing Rate with direct channels impacting investment quality and strategy.

2.4: Valuation in the private equity market

Valuation is important in the context of the private equity market, as it allows determining the potential of the investment and its possible revenue. Two of the most often used parameters are the Internal Rate of Return (IRR) and the Enterprise Value (EV).

Internal Rate of Return (IRR)

IRR stands for Internal Rate of Return and it provides information of the expected yearly return from on investment project, thus providing a basis for evaluating profitability. It means that the higher number on the IRR means the better investment (Hazen, and Magni, 2021).

Enterprise Value (EV)

EV is the total value of a company in the market price of equity and debt and cash. It hives an overall picture of firm value that is vital when making decisions in mergers and acquisitions, as most private equity houses do.

2.5: Exits in the private equity market

Management exits the market of private equity is vital in order to make money in the investments made. Some of the most common indicators typically used during exits are the Cash- on- cash Multiple (CoC) and the Exit Multiple.

Cash- on- cash Multiple (CoC)

Cash-on-Cash Return measures the yield of the total cash obtained from the investment as compared to the cash which is invested. This result gives a totally absolute picture about the exit strategy of the investor, which is very important to decide the overall success or failure of the exit strategy.

Exit multiple

Selling price to initial investment is determined by the Exit multiple which sees the relation of the company’s selling price to its investment value (Tang et al. 2023). It captures the value of the investment exit which is the multiple of the invested capital with higher multiples referring to more profitable exits.

3: Private Equity in the Current Economic Environment

3.1: Overview of Current Private Equity in Economic Environment

Figure 2: Sector of Increased Deployment through Private Equity Deals

(Source: ey.com, 2024)

The current private equity in the global economic environment can be fundamentally determined in terms of surge or increase established towards international agreements and deals. As of 2023, a 36% increase in private equity valuation has been observed in comparison to 2022 and 2021 which elaborates that private equity valuation deals around the globe have achieved near completion status.  The achievement of near completion status by private equity deals is a result of global markets becoming more stable and upbeat which allows organisations to encapsulate revenue and profitability maximisation. In 2023 and in recent economic circa, the majority of investments and deals have been drawn by the tertiary sector and the technology industry in which sufficient financing provisions are being made available by concerned parties. An aggregate 70% contribution towards increased deployment is also identified in favour of tech deals and is followed by healthcare and financial services deals that comprise 63% and 57% equity infusion deals (ey.com, 2024).

Figure 3: Global Private Equity Acquisitions

(Source: ey.com, 2024)

The overview of current private equity in the economic environment can also be determined in terms of acquisitions carried out by organisations in a quarterly mannerism. As of quarter 3 2024, the total volume of private equity acquisitions is identified as 134 billion which contributes to a total value of approximately $ 180 billion (ey.com, 2024). From the above figure a slight decrease in private equity acquisitions can be identified during recent times which can be attributed to increase in taxes being a critical economic concern for companies. Overall, it can be identified that the scope of private equity is growing significantly and future importance of raising Finance and funding by considering economic conditions and cost of financing will gain significant momentum (Shabbir et al. 2021).

3.2: Key Implications of Current Economic Environment on Private Equity

The key implications of the current economic environment on private equity can be determined in terms of multiple factors which are individually examined as follows.

Economic Growth

Economic growth is the primary factor whose fundamental implications on private equity include favourable measures for a company in which profit maximisation can be obtained by securing finance for critical operational activities. Economic growth also contains favourable implications towards private equity in terms of channelling financial mobility across the domestic and international economy where individual capitalists perform the role of key catalysts to drive monetary flow. However, as per critical opinions of Tiep et al. (2021), economic growth can contain adverse implications on private equity where increasing competition can be witnessed in the market which can thereby affect financing costs. 

Interest Rates

Interest rates are the second factor whose positive implications fundamentally involve the accessibility of a low financing leverage for companies and the economy when interest rate is significantly lower. As stated by Ning et al. (2023), the facility of low interest rate and leverage is a promising scenario for companies, economy and investors in which portfolio value addition and growth in valuation and exit opportunities can be obtained. However, the downside of increased interest rates could spike high investment and leverage risks for companies, economy and investors which might lead to decline in operational and financial aesthetics thereby impacting survival.  

Inflation

Inflation is the third factor whose key implications predominantly involve determining the overall scope available for a company to evaluate asset valuations. Zhao et al. (2022) critically idealised that a high inflation rate is a challenging proposition for an economy which can lower asset pricing thereby leading to ineffective private equity contribution towards economic development. The increase in inflation is also a disturbing proposition for companies and private equity investors in which the purchasing power of all parties reduces drastically thereby limiting future scope of capital infusion for business sustainability.

3.2: Secondary Implications of Current Economic Environment

In addition to the above factors, the secondary implications of the current economic environment towards private equity can be evaluated through the following factors.

Technology

The implications of technology on private equity are identified to carry positive features if companies adopt modern solutions for encouraging future financial diversification and investment traffic. The implications of technology mainly allow companies to facilitate financial transparency and effective management of portfolios in order to stimulate market presence and dominance (Sumaila et al. 2021). The implications of technology are also vital for a company to improve operational and financial productivity which allows the scope of managing complex financing requirements needed to maintain stability and sustainability.

Governance and Regulations

The implications of governance and regulations can be fundamentally measured in positive terms where companies can have the scope of maximising financial incentives and solve critical financing adversities. These can additionally involve the ability to mitigate risks due to cash flow issues which can enhance financial and market controlling abilities for a company. However, as per critical views of Anwar et al. (2021), the adverse implications of governance and regulations could lead to high documentation requirements which can delay the process of acquiring funds for facilitating organisational mobility.

Operational Productivity

The implications of operational productivity can be determined in favourable terms which involve having the provision for companies to experience growth in earnings and business appeal. As per narratives of Hotchkiss et al. (2021), the growth in business appeal is a direct consequence of increased business value in which more investors can be accommodated to generate financial enhancement. This would consequently allow a company to create a high IPO and goodwill valuation in the market and credible business decision making can also be facilitated in the long-term to channelise growth from private equity.

Employment and Labour

The implications on employment and labour due to private equity is a potential area of concern which is likely to have adverse impacts where job losses and mass exodus of employees can be witnessed in an economy. As critically explained by Ewans et al. (2022), the adverse implications of employment and labour can also endorse cost cutting strategies by companies which can also contribute to adverse economic development thereby leading to job scarcity. The higher emphasis on private equity is also a critical contributor of negative economic development in terms of reducing GDP and per capita income due to which future sustainability of companies can become questionable.

4: Recommendation on Strategy and Funding

4.1: Recommendation on Private Equity Strategy

The available private equity strategies that can be exercised by companies are venture capital and buyouts. The features of venture capital mainly include provision of financing and capital in the form of active participation being enforced by investors. The venture capital form of private equity strategy is also characterised in terms of venture capitalists having a minimal stake holding control or share instead of acquiring a bulk ownership percentage. The features of buyouts mainly involve internal management of a company purchasing significant ownership stakes. According to Cohn et al. (2022), ESOP or employee stock ownership plan is a proactive part of buyout in which operational efficiency and control can be retained by an organisation to facilitate financing and simultaneous growth. Based on the above private equity strategies, it is recommended to choose buyout and this recommendation is justified since financing controlling can be held significantly and the potential risks are fairly lower in comparison to venture capital strategy.

4.2: Recommendation on mode of Private Equity Funding

The mode of private equity funding can be segregated through external and internal sources of finances. The external sources of finances mainly include debt and equity whose characteristics predominantly involve raising capital through loans and issue of shares (Han et al. 2021). The internal sources of financing are identified as bootstrapping in which self-financing is predominantly applied by companies to fund future investments and operational activities. Hence, the external mode of private equity funding is recommended to be selected by a company since a wide variety of options towards financing can be explored and a bulk capital requirement can be successfully met in the long run. The recommendations on selecting the external mode of private equity funding are also justified in terms of allowing flexibility to companies in which funds acquired can be allocated to various departments that collectively generate business growth and expansion.

5: Conclusion

This assignment has predominantly discovered that fundraising is an important proposition for the private equity market in which strong value propositions and articulated strategies are vital for a company to maintain financial sustainability in the market. The exit strategies in the private equity market are also vital for investors to identify which can be mainly facilitated in the form of IPO listings and potential mergers and acquisitions. The report also outlines an overview of current private equity in the economic environment which is considered to grow significantly in terms of determining increasing valuation deals around the globe. The implicative factors of the current economic environment on private equity are further identified with respect to inflation and employment. Here, the scope of future investments and generation employment opportunities will be reduced, which can create difficulties for an economy to maintain a dominant global position. Recommendations for private equity strategy and funding mode are identified as buyouts and external mode of financing. These are justified in terms of allowing a higher financing and ownership control for companies and allowing diversification and flexibility to use finances as per convenience.

Reference List

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