What this module covers
Private equity is ownership of companies whose shares do not trade on a public exchange. The term covers several strategies that work in different ways. This module describes three of them, the structure of the Canadian market, how returns are measured, and the features the asset class shares. Two worked examples follow: the effect of leverage on a hypothetical buyout, and the same multiple earned over two different periods.
- What private equity is
- Buyout, growth equity and venture capital
- The Canadian private equity market
- How returns are measured: IRR and MOIC
- Commitments, capital calls and the J-curve
- The spread between managers
- What the asset class requires
What private equity is
A private equity investment is an ownership stake in a company that is not publicly listed. There is no ticker, no daily price and no exchange on which the stake can be sold at will. The investment is turned into cash when the company is sold or listed, which may be years after the money goes in.
What investors accept in exchange is illiquidity. What they seek is exposure to companies at stages of development, and to ways of adding value, that listed shares offer less of. Managers often argue that private companies can be bought at lower valuations than comparable listed ones. Whether that holds depends on the period and on the transaction.
"Private equity" is an umbrella term. The three strategies below sit under it, and each carries a different mix of risk, horizon and source of return.