a. Public equity is the equity that is issued in a primary market through an IPO or a public offer. These shares then trade on the secondary markets.
b. The private equities, on the other hand, are issued through a private placement and are not traded/listed on any secondary market. The private placement is generally made to a limited number of sophisticated investors, such as institutional or accredited investors. These are highly illiquid securities, whose prices are not market-determined. The issuers of these securities are not required by the regulatory authorities to publish the financial statements.
c. The private companies would also be classified as a public company, under certain jurisdictions, if the number of shareholders exceeds 50.
1.1. Types of Private Investments
1.1.1. Venture Capital
a. Venture capital is a field of private equity industry that focuses on investing in new and young companies with high growth rates. They provide funds from seed level to growth financing.
b. The VCs are generally set up as a limited partnership.
c. VC investments are made usually with a 10-year life. The first 3-5 years are the investment phase and the later years are the harvest phase, where the investments are liquidated through private placements or through IPOs.
1.1.2. Leveraged Buyout/Management Buyout
a. LBO/MBO is a process where a group of investors or management makes use of debt to purchase all outstanding shares of a publically traded company.
b. Once such shares are purchased from the market, the company is restructured and these shares are reissued in the market.
1.1.3. Private Investment in Public Equity
a. The private investment in a public company is done through a restricted stock or preferred stock, which is usually issued at a discount.
b. The main advantages of private investment are:
i. The investee company can focus on long-term value creation, rather than wasting time over capital management;
ii. It provides higher risk-adjusted in the inefficient markets to the investors; and
iii. It helps to lower the cost of the investee company due to lack of filing requirements, listing fees, and regulatory costs.