A Globalizing Industry
- Handbooks in Venture Capital series
Edited by Hans Landström and Colin Mason
Chapter 3: Institutional investment in private equity
This chapter reviews institutional investment in private equity by investors such as pension funds and insurance companies. Private equity investments are investments made directly in investee companies, and are carried out primarily to provide the following types of working capital to investee companies: venture capital, growth capital, distressed investments capital, mezzanine capital and leveraged buyout capital. These are deemed by the industry to be distinct investment market segments. Venture capital, for example, refers to very high risk investments made in less mature companies, for the launch, early development, or expansion of a business, while leveraged buyout investments are provided to very mature companies which generate uniform operating cash flows. This chapter will cover institutional investment in private equity through (1) limited partnership private equity funds; (2) listed private equity funds; (3) private equity fund-of-funds; and (4) direct institutional investment into private investee companies. Limited partnership private equity funds are essentially pools of funds managed by a specialist private equity fund manager with the mandate to invest in the equity of private companies. Access to these funds is strictly limited to sophisticated investors such as institutional investors and high net-worth individuals. Listed private equity funds on the other hand are pools of funds that are listed on public exchanges and therefore are accessible by retail investors. Private equity fund-of-funds are similar in nature to limited partnership private equity funds but instead of investing in equity of private companies, investments are made in other private equity funds. Finally, investments in equities of private companies can be made directly by the institutional investor without going through a private equity fund manager.
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