By Makarand Gawade, Staff Writer
In the last module I took a class of Global Private Equity by Professor Gary Gibbons. I must say, this was an excellent course and I began to understand the multiple dimensions of the realm of private equity (PE). I believe this is a very interesting space and a lucrative industry to work in. For many candidates, this is a glamorous industry and it is indeed challenging to get into. Through this article, I wish to give you an overview of the global private equity industry, including: structure, future, and why emerging markets look so promising.
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Structure of the private equity firm: The partners of a private equity firm are the general partner (GP) and its investors (that promise capital), known as limited partners (LPs). Limited partners are generally institutional investors such as pension and endowment funds, retirement funds, insurance companies, and high net worth individuals. The PE firms are structured as partnerships with one GP making the investments and several LPs investing capital. All institutional partners of the fund will agree on the set terms laid out in a Limited Partnership Agreement (LPA). Some LPs may also ask for special terms outlined in a side letter. The GP invests the fund’s committed capital in public and private companies, manages the portfolio of investments, and seeks to exit the investments in the future for sizable returns. Typically, LPs just provide capital and don’t have a role in deciding in which companies to invest; the GPs decide that. However, if LPs are not satisfied with the returns generated by the GP, LPs may choose not to invest with that PE fund again.
Future of PE industry: I believe that emerging markets will be growth markets for the PE industry and that large fund managers with abundant resources should invest globally, especially in emerging countries such as BRICS countries, Thailand, Indonesia, Vietnam, Magnolia, Peru, Colombia, Poland etc. I think the PE industry is global, yet the largest players such as Carlyle, KKR, Bain Capital etc. are all based in the US. The US accounts for only 20% of the world economy, but accounts for almost 100% of the world’s largest PE firms. Thus, I believe that in the future, emerging markets will stimulate growth of the world’s largest PE firms. As the economic growth shifts towards the rapidly developing emerging economies, the PE industry will experience a paradigm shift to adapt to an increasingly globalized world. The globalization of PE will stimulate global fund-raising and cross-border and diversified investments. More and more PE firms will open offices overseas (large groups such as Carlyle, Bain, and KKR have already established multiple offices in the developing countries) to facilitate their portfolio companies and access the markets in emerging economies. The PE market will be driven by countries with superior GDP growth, greater resilience to financial crisis, and increasingly attractive socio-economic environment.
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Why emerging markets look the best: The next growth area for PE industry is in emerging countries. With the advent of a middle-class, a large educated young population, and the increased spending power of consumers, emerging markets are experiencing rapid economic growth and development. However, emerging economies have multiple barriers, including poor investor protection, less liquid exit markets, poor infrastructure, volatile currency, often unpredictable government changes, and corruption. In spite of multiple barriers, emerging economies, backed by superior GDP growth, a growing middle class, abundant resources, and liquidity in local and debt markets, provide exceptional growth opportunity for the PE industry.
I believe countries such as China, India, Indonesia, Thailand, and Malaysia in Asia, Brazil, Colombia, and Peru in South America, Turkey and Poland in Europe, South Africa and Nigeria in Africa, look really interesting for future growth of the PE industry. China and India are largely driven by strong economic activity, large capital markets with liquidity, abundant human capital, a growing entrepreneurial culture, stable governments, and relative ease of doing business. Undoubtedly these two countries will represent the major chunk of opportunities for the PE industry in the future. In comparison with China, India needs to drastically improve its infrastructure to sustain the economic growth.
In countries such as Brazil, Colombia, and Peru, the middle class is growing, consumers have more disposable income than before, and governments are working to provide stable environments to do business. South Africa and Nigeria are leading the way in the African continent. Countries from emerging Europe such as Poland are showing great promise with resilient currency, low inflation rates, easy credit availability, and lower risk of capital flight.
Entry level jobs in PE industry: Typically an entry level job in the PE industry is an analyst or associate position, and mostly MBA or masters students are eligible to apply for such positions.
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The entry level job would be primarily driven by four activities:
- Spreadsheet analysis of the economics of potential target companies
- Industry research and screening of potential buyout candidates
- Inputs for strategic development and acquisition opportunities for a senior partner on a potential investment target or company
- Coordination of due diligence and research items required to carry out a transaction
The entry level jobs may include performing due diligence, financial modeling, and valuation of the companies to provide analytical and asset valuation support to the investment team. Furthermore, it may include drilling into financial information of the diverse companies, analyzing trends in the industry, and performing market research to find similar guideline companies.
Resources:
- http://insights.som.yale.edu/insights/future-private-equity
- http://www.ey.com/GL/en/Services/Transactions/ey-capital-insights-14_Future_of_PE_mainstory
- http://www.mergersandinquisitions.com/private-equity-emerging-markets/
- http://insights.som.yale.edu/insights/future-private-equity
- http://www.efinancialnews.com/story/2014-01-16/challenges-for-emerging-markets-private-equity-funds
- http://www.financierworldwide.com/qa-valuations-for-the-private-equity-industry