A few decades ago, the society, particularly in developing countries, did not see the need of educating the girl child. This is because she was expected to become a mother someday, which in itself is a very demanding task because she has to take care of the children and run a few errands on behalf of her husband.
In fact, most families did not send their daughters to school because they felt that it was not necessary. This suggests that education was reserved for boys. Essentially, Bowles and Gintis argue that in the US, women started working during the civil war because their men had been deployed to the battlefields (14).
There were many challenges that were facing the girl child with regard to education. First most girls could not go through the education system because some would get pregnant, which left them with no alternative, but to quit school. In addition, some girls would be married off at an early age, especially in developing countries.
Girls were therefore perceived to be weak even though their male counterparts were responsible for their suffering. This is because the boys who impregnated them were allowed to continue learning. Similarly, most communities do not send their daughters to school because they assume a vacuum will be created in their households.
However, according to Nussbaum, women were more enlightened towards the end of 19th century by the many non-governmental organizations that had been established to fight for the rights of the girl child (19). On the other hand, the education of the boy child has been ignored since everyone is concentrating on the girl child.
In general, there is still a gap to be filled, and this can only be achieved by giving both sexes equal opportunities. The opportunities of women are reserved as opposed to those of men. Most organizations are reserving a good number of their job openings for women and thus, men continue to suffer in silence because they are not supposed to show any signs of weakness.
Statistics from US learning institutions indicate that the rate of female enrollment is much higher than that of men. From early days, boys have been made to believe that they do not have to work hard or even go to school because they are their parent’s heirs.
Alternatively, Matus and Winchester point out that the aggressiveness of the girl child has made her to pursue further education because that is the surest way of liberating herself. Additionally, the global population of men is much lower than that of women, considering that they are the ones who are affected by child mortality.
Moreover, the cost of sending a child to school is still high, especially during these difficult economic times. In most developing countries, there are numerous non-governmental organizations striving to empower women. This is done by issuing monetary handouts to the girls’ parents; there is no one who is concerned about the welfare of the boy child.
This is unfair competition because the ground should be leveled for both sexes. The boy child is facing the same challenges that are being faced by the girl child. For instance, in early days, only women suffered from sexual abuse, but nowadays the boy child is being faced by the same challenge. The role of men in the society has changed from being the providers to caregivers. This has been brought about by depreciation of our values.
Gone are the days when women used to depend on men for their upkeep. This change of culture has been brought about by economic factors. In today’s world, a man’s salary is not enough to support a family, and that is why the two sexes need to be empowered equally. The solution to gender inequality should start right from the school. In most schools, there are more male teachers, and thus the female learners are not well represented. Furthermore, the female teachers concentrate more on the boys.
In this light, several approaches that can be employed to achieve gender equality in education. The learning curriculums should be revised to favor both sexes. Currently, there is a general perception that engineering and technical courses are not meant for girls. Comprehensive review of these courses will result in a balanced enrollment rate. Thus, no courses will be reserved for any sex, as long as one has the skills and the ability to deliver the desired results (Williams 1).
Learning institutions should hire more female educators to bridge the male-female gap. Female teachers will act as role models for the girls who have for a long time been demoralized. The balance should be realized right from the time teachers are being recruited into the training colleges.
This will ensure that the same balance is observed when the same educators are being deployed to their respective learning centers. The school infrastructures of most learning centers in developing countries are in a sorry state such that both sexes are not content. For instance, if the toilets do not have doors the girls would not feel comfortable while using them owing to their gender orientation. This suggests that more funding should be designated for improving the infrastructure of such centers.
Moreover, support programs should be offered to both sexes so that the boys are not under pressure to quit school. This means that there should be a gender balance in bursary allocations. Additionally, the teams that are in charge of education systems should be comprised of both men and women. This will make it possible for every group to safeguard its interests. Civil society groups should also be called upon to help in eliminating cultural issues.
Works Cited
Bowles, Samuel and Herbert Gintis. “Schooling in Capitalist America Revisited.” Sociology of Education 75.1 (2002): 1-18. Print.
Matus, Ron and Donna Winchester. ”Women Outpace Men in Education.” St Petersburg Times. 2008. Web.
Nussbaum, Martha C. Women and Human Development, Cambridge: Cambridge University Press, 2000. Print.
Foreign Equity Restriction are constrains on the degree of ownership and control, referred to as equity in company law and finance, which foreigners of a country are permitted to control (Emery et al, 2007).
Such restrictions are strictly adhered to and are imposed in two different ways. The first way is through legislation. Restrictions through legislation are initiated by the government and enacted by the law making arm of the government. Such restrictions are usually aimed at or founded on the principles and provisions of public interest.
Therefore, where the country’s government has enough reason to suspect that the unrestricted investment by foreigners is against national interest, it will institute the restrictions. The second way in which the restrictions can be put in place is by the decisions of the individual companies. This paper seeks to explain the concept of foreign equity restrictions and the reasons as to why countries and companies adopt such restrictions.
Body
The rationale behind the existence of a firm is to maximize the wealth of its shareholders. This objective, which has since replaced the traditional goal of profit maximization, calls for a number of strategies with regard to the manner in which shares are sold. Domestic companies and organizations maximize net worth of the business through price discrimination when it comes to selling their shares to both foreigners and locals.
An increase in the net value of the business translates to an improvement in the wealth status of the owners. The discriminatory pricing practices are applicable where and when the demand variable for local shares varies between local and non-citizen investors (Emery et al, 2007). The company may opt to sell the shares at different prices so as to achieve stability in control.
One of the major reasons why this kind of discrimination may be practiced is the need to protect the autonomy of the local industries. Since the decisions in the limited companies are made by a majority of the shareholders, it is important that the local shareholders outnumber the foreign shareholders so that the organization can achieve the status of a self-determining entity (Eun & Resnick, 2007).
Self-determination is vital when it comes to making strategic decisions. A company that has excessive foreign control will be controlled by the non-citizens who will make decisions that suit their interest. There is a possibility that the interests of the foreigners may not be the same interests of the locals following differentials in the rates of taxation.
A country’s government may also opt to come up with these restrictions for political reasons. The most potent illustration to this point is a recent case where a Dubai company intended to buy an American organization dealing in shipping and port services. The American leaders protested the move bitterly citing threats of terrorism as the major reason.
While American laws do not restrict such transactions, the political factor ended the transaction pre-maturely. Political factors are used in the name of national defense. The politicians may cite such concerns as national security to bar a competing economic force from investing in their territory (Emery et al, 2007).
This concept of foreign equity restrictions is most prominent in Switzerland, Japan and Brazil. In Switzerland, the restrictions are enacted and enforced by the individual companies with an aim of preventing dilution of power and control of the locals. This is done to encourage domestic governance of the companies (Eun & Resnick, 2007).
In Japan, the restrictions are put in place by the law. This is done for various reasons; among them national security and defense. In Brazil, the most prominent sugar businesses that are mostly run by families influence the government to institute such restrictions. The United States of America practices selective restriction such as restrictions on foreign acquisition of media services controlled by the government.
Basically, equity investment strategy in business refers to investing money through buying stocks. In order to recover this investment, a shareholder has to sell the stocks to other interested investors. Under this strategy, “stocks are selected for their strong earning potential and appreciation over the long term” (Peng, 2013, p. 29). This means that this strategy is applicable in companies that specialize in purchasing stocks or buying companies on behalf of clients. The shares are often grouped into different categories, depending on their worth and period of investment. Normally, “as long as the stock’s underlying fundamentals hold true, the stock is retained in the portfolio, even though there may be price swings” (Morrison, 2009, p. 46). The stocks may be liquidated whenever when the company feels that the dynamics in the stock market are unfavorable.
Applying the equity investment strategy at Berkshire Hathaway
Berkshire Hathaway Incorporation is a multinational company that specializes in several business interests within the US and other parts of the world. The company has a conglomerate of different products and owns businesses such as NetJets, FlightSafety, and BNSF among others. The company has shares in companies such as America Express, IBM, Coca-Cola, and series of restaurant brands across the globe (Berkshire Hathaway Inc, 2015). Interestingly, the company “averaged an annual growth in book value of 19.7% to its shareholders for the last 49 years, while employing large amounts of capital, and minimal debt” (Morrison, 2009, p. 39).
Over the years, the company has been consistent in investments in stocks that are publicly quoted for different companies across the globe. Besides, the company has been very successful in buying companies and shares for clients. At present, the company’s portfolio includes businesses in railroad, publishing, retail, petroleum, and manufacturing sectors. Since company has interests in buying shares, Berkshire Hathaway may use the equity investment strategy successfully in the UK market.
In the case of the Berkshire Hathaway, the use of equity investment strategy in the UK market will be very successful since the company has been very consistent in the business of buying stocks and companies across the globe. In the case of the UK petroleum industry, the Berkshire Hathaway may apply market-timing and short-selling strategies to buy shares in companies such as BP Group, Tallow, and Imperial Energy Corporation.
Under the market-timing strategy, the Berkshire Hathaway would apply the buy-and-hold approach in order to capture the current short term dynamics in the UK petroleum industry following the current reduction in the global oil prices. The Berkshire Hathaway may apply this approach to maximize stock returns through simple strategy of buying as many shares as possible at the current low prices and holding them to be sold when the prices rise. As a renowned contrarian investor, the Berkshire Hathaway Incorporation “may look for certain market indicators that reflect an overbought or oversold condition and take an opposite position against the prevailing trend” (Peng, 2013, p. 34) to maximize returns within the UK petroleum industry.
Why Berkshire Hathaway would be successful
Since the Berkshire Hathaway has been successful in buy-and-hold approach in the US stock market, it would find it easy to penetrate the UK petroleum industry through use of the market-timing approach. Besides, the company has strong knowledge stock buying and selling through use of fundamental market outlook tools to minimize any risk as a result of bad investment. In addition, the company has admirable sound equity performance over the past three decades. At present, the company has two categories of shares called share A and share B (Berkshire Hathaway Inc, 2015).
Export-base strategy
Under the export-based strategy, the primary intention is to evaluate the underlying potential of the export products of a company within the international markets. This may be achieved through critical review of product performance at the local market and the possible demand in the international market. For instance, for a successful company based in the UK such as the SCISYS Company, there is high probability that its products would perform well the in the US market since the two regions share similar market dynamics and needs. Another significant tool that is used to access the sustainability of export-based strategy is reviewing the unique product features.
For instance, when the quality or specks of a local product is very difficult to duplicate in a foreign country, there is a high chance that such a company will excel in the foreign market. Generally, unique products may face minimal competition and high demand in the foreign market since the export potential is high. In addition, when a product is facing a shortfall in demand at the local market due to changed customer preference, it is possible to expand into foreign markets where the demand for the same product is still high.
Applying the export-based strategy at SCISYS Company
In the past two decades, technology has significantly become sophisticated making it easier and economical for people to carry out business across the world. Two major driving forces for this are improvement in the communication networks and popularity of the internet in the global business arena. The driving forces have broken down many physical barriers to worldwide communication which used to limited connectivity between businesses over long distances. The entire business platform of the SCISYS Company in the UK is base on technology service delivery. Founded in the year 1980, SCISYS Company has been successful in the UK technology market as a provider of accounting software, broadcasting services, and digital satellite products (SCISYS Company, 2015).
Export-based strategy has influenced dramatic increase of product export as a strategy for the SCISYS Company and has accelerated the role of foreign markets in its current business sustainability strategy. Export-based trade appears to be understood as a continuous process of increasing cross-border economic flows, financial and socio-economic, leading to economic interdependence among formally distinct companies. In the case of the SCISYS Company, export-based strategy flourished in nineties through export flow into Germany, operations in other counties rather than home, and through its internationalization strategy.
SCISYS Company introduced its overseas markets in Australia in 1990, Thailand in 1999, New Zealand in 2000, and Indonesia in 2004 while the company engaged with 12 overseas production factories in 2006. SCISYS Company view export-based strategy as a more efficient way to address future aspect in advance including spreading unpredicted risks and prospects (SCISYS Company, 2015).
Export-based strategy has created positive impact in the technology sector with an innovative and deviating period of organizational economic activities including development of technology, increasing market demand, production and workflow, investment and trade patterns. Moreover, export-based strategy has positively modified the employer and employee relation within the SCISYS Company and given a new shape in the business activities crossing the border limit.
With lean production and outsourcing, the technology industry in the US is increasingly important for global production chains. Many technology companies are going over to modular assembly in which the main components manufacturer not only supplies but also coordinates the design manufacture and installation of the major parts or systems in different technology products. Due to export-based strategy, the emergence of local production systems has facilitated regional integration by creating opportunities in the foreign markets. With reference to the SCISYS Company, there is high potential of penetrating the US market through application of the export-based strategy for its products. This is possible since the current competitors in the US have very expensive products.
Through use of friendly pricing strategy, the company may tap the low economic end market. From past experience, SCISYS Company’s mode of entry in markets such as Germany was through direct selling of products via private outlets. This mode of entry is known as specialty product producer and may be applied in the US market. In this mode, the company produces, sells, and promotes its self in the foreign market. This approach has been successful in some countries due to the company’s renowned brand name.
Why SCISYS Company would be successful
An entry mode can be defined as the approach which an organization uses to enter a new international market. Since the SCISYS Company will use different channels to market its technology based products, the organization’s strong brand name and association with quality will guarantee its success in the US market. Some of the channels that company may use are systematic product modification within foreign markets and partnerships with local businesses to ensure that the export-based strategy is successful.
References
Berkshire Hathaway Inc. (2015). About us. Web.
Morrison, J. (2009). International business: Challenges in a changing world. New York, NY: Palgrave Macmillan. Web.
Peng, M. (2013). Global strategy. Alabama, Al: Cengage Learning. Web.
This paper explores the returns of private funds and the returns of the S&P 500, to ascertain which returns are more favorable for investors for investing. The study will make use of quantitative research methodology in the collection of the required data for use in making comprehensive conclusions on which returns are better.
For this reason, a survey would be appropriate in carrying out the research and collecting the required information. Empirical findings have shown that returns from private funds have some edge over the returns of the S&P 500. Despite this, researches in this area are limited, and thus there is a need for more comprehensive research to bring out the varied differences between returns of private funds and returns of the S&P 500.
Introduction
There are several factors that investors have to consider before making any investment decisions. One of these factors is the number of returns to expect from the projected investment capital. As such, it becomes highly important to evaluate investment options that have a high rate of return on invested capital. According to a study carried out by Redhead (2008), investors can consider the profitability of index funds against private equity funds in terms of the returns. However, most investors are likely to make poor investment decisions in cases whereby they lack the necessary information about various investment opportunities. Over the past decades, a lot of concerns have been raised over the behavior of stock prices, private equity funds and the Standard and Poor’s 500 stock index often abbreviated as S&P 500.
There has been a common belief that firms listed in the Standard and Poor’s 500 price index benefit from an increase in stock price that is permanent implying that they enjoy a permanent rise in returns on invested capital. Nevertheless, recent studies show that there is a significant relationship between the event window and the size of price reversal, whereby a longer event window results in a larger price reversal (Jones 2009). Evidently, the returns for the S&P 500 are not permanent due to the interplay of financial factors and changes in market conditions.
On the other hand, private funds have become popular in financial and economics literature. Private equity funds have grown significantly over recent years. For example, there was an increase in private equity funds in the US from $5 billion to $300 billion between 1980 and 2004. Even though private equity funds are considered a good example of major classes of financial assets, there is limited literature on how such funds perform in terms of returns. This paper provides a research proposal for the study analyzing the returns of private equity funds and S&P 500, in an attempt to compare the two types of funds in terms of their returns.
Information on the private equity efficacy of private equity acquisition assets criticizes equity and decisively affects how ROI is measured. The private equity business has long depended on the interior rate of return (IRR) as its principal private equity efficacy extent, but that metric has been extensively condemned — not just in the theoretical investment community but among organization consulting companies, too. Utilizing the interior rate of return makes funds look much more superior than they are.
Contrary to private equity common associates, the majority of investment economists evaluate stock private equity efficacy utilizing an indicator titled public market equivalent. This indicator equates revenues from capitalizing in private equity with incomes from analogous investments in the stock marketplace, as evaluated by the S&P 500 or other typical marketplace keys. This indicator offers the limited partners consistent evidence on two things. First, how much money they recuperate at the end of their venture in a private equity deposit comparative to their original outlay.
Second, how that matches the profit, they would have produced if they had capitalized in some other benefit as an alternative — for instance, in the businesses that practice in the financial market. The representative decade-long lifespan of a private equity stock means that the genuinely recognized revenues cannot be identified until the stock is discharged after a decade.
Depositors, on the other hand, are concerned to identify how the assets are carrying out every year. To identify the performance, private equity broad-spectrum companions estimate yearly stock private equity efficacy founded on short-term assessments of non-wholesaled group businesses. Therefore, real revenues apprehended by the LPs when the stock is discharged may be deficient of provisional approximations.
Company Overview
Gulf Islamic Investments LLC (GII) in the United Arab Emirates-based Private Company offering financial and investment services. The Company came into existence in the year 2004. The company’s operations are regulated by the Emirates Securities and Commodities Authorities (ESCA). GII has existed for several years now. The company was founded by H.E Mohammed Ali Rashed Al-Abbar and other Arabic entrepreneurs.
Gulf Investment company deals with a number well researched, risk mitigated and well-documented investment opportunities in private equity, venture capital, infrastructure and real estate on a global scale. GII enjoys recognition and respect within GCC and all over the world, especially where it has significantly impacted its clients. The company has made itself a profound name over the identification of opportunities and assurance of higher and quality consistent returns to its customers.
This analysis looks into what the company partakes in, various investments and financial records over the last few years that it has been existing. Information obtained in the analysis thereafter is available from the company website. Financial reports and company announcements have been seeking to learn more about GII has an investment company.
Brief History of GII
GII roots from two companies, established over a decade ago. Union National Consultancy Company (Pre-GII) which was rather renamed to GII and Allied Investment Partners were established to aid manage and provide advisory over private assets owned by a member of the Abu Dhabi Royal Family (GII, 2016). Some changes have been adopted after the transformation to GII that will be discussed in this analysis.
Under the leadership of a group of prominent shareholders and committed entrepreneurs, the company boasts a track record of managing assets worth US$ 2.5 Billion, US$5.5 billion of secured debt, and an excess of US$1.0 billion in equity and M&A financing.
Activities Performed by GII Company
Gulf Islamic Investment Company offers management services concerning investment throughout their life cycle. With experience experts, GII has proved competence in providing the following specific services in the investment life cycle. Services within active management are tailored with the aim of outperforming passive index funds and attain the best performance. Successfully employing active management is still a challenge to some experts. However, this is not the case with GII, considering its existence in the industry today. The challenge is even more complex considering the nature of Islamic Financing.
By not restricting performance within the established guidelines, active management services offered in GII has helped investor mitigate risks through real-time strategies. Investors aligned to GII have been able to reduce exposure to banks that are considered to be offering risky ventures.
GII thrives in Equity Funding. The company holds an upper hand when it to raising equity funds. With a well-networked relationship with its shareholders, strategic partner, investors and clients within the GCC and all over the world, GII does not find a challenge with raising capital. In return, our investors within GII exploit opportunities in increasing stock ownership. This is a cheaper approach that benefits both investors and companies seeking equity funding, thanks to GII. The company deals with a minimum of $10 million capital which can be sourced and transacted within the shortest time possible.
GII deals with debt financing. The company prides an extensively experienced team in banking. The banking team operations are regulated concerning the Shari’-ah compliance requirements about debt financing. Financing debt entails acquisition finance, project finance, working capital finance, loans and corporate loans sourced from both local and global lenders.
GII offers advisory services to its clients. A team of experts in corporate finance helps clients and portfolio companies make the decision. Financing strategy advisory entails decisions in the form of finance a client can seek, keeping in mind the cost of sourcing, payment as well as its availability. Operating in a keenly regulated commercial environment, the company offers advisory services on balance sheet optimization. Clients to GII are in the best position to maintain profitability by well utilizing their assets without overlooking existing regulations. An institution facing temporal liquidity issues as well as challenges in determining or making a decision based on the cost of capital reduction can also seek both services and advisory from GII’s team of experts.
Companies or businesses cannot exist without a deal. GII stands in between prospective business owners and capital providers. With its versatile group of capital owner and potential suppliers, this may be the easiest task that the company perform with pride. Once a business comes into existence and a sound business plan is established, there arises a need to implement the plan.
Implementing a business plan is also referred to as project incubation. GII provides project incubation services. They entail implementing plans, providing management, financing, establishing relationships, help formulate a board of governors and recruiting operations and executive staff.
Compliance with Islamic Principles
As the name suggests, the company is found on Islamic principles that govern financial activities Islamic principles aim at fostering social and financial objectives about the Sharia Law. GII is obliged to follow regulations as stipulated within Islamic principles. GII employs experts to source, assets, structure and certifies investments that comply with guidelines of Islamic Finance. GII places weight on investments that are GCC relevant.
Investment Focus
GII focuses on the demands and the desires of its shareholders and investors. This should be striving for every company or organization. To ensure performance as well as steady growth, GII advocates and adopts original investment ideas. Such ideas are superbly natured with great managerial capabilities and well-crafted and proofed operation models. The company has successfully implemented these ideologies, rooting from pre-GII organization. GII has managed to invest in the following areas successfully, as discussed under each investment focus.
Private Equity
GII looks for unique equity investment opportunities in all sectors of private equity: expansion capital, turnaround, buyout, special situations. GII offers financial stability at all points of company operations. The company partners with all forms of management: old and new management. In some circumstances, GII establishes new managerial arrangement, biased to its organizational goals and objectives. The company finds it attractive to partner with strong partners, to establish a kind of relationship that will be affirmed with outsourced expertise to improve investment value.
GII assumes a life cycle approach that entails active management as from the entry point to the point of exit. Increasing investors’ return is the core operating principle of the company. Thus, GII is quite selective on the type of industries to engage investors’ contributions. The company has pointed out some of the sectors that it considers synergetic based on growth trends. Manufacturing, retail, transportation and logistics, health, education, conventional and renewable energy, technology, financial services, and industrial sectors are just part of what the company views as investable sectors of the economy.
Real Estate
Real estate is a boom, and nobody imagines an investment company like GII to be lagging when it comes to investing in real estate. However, GII’s investment style is unique and profit-oriented. The real estate industry is more than dynamic, there exist several ups and downs that make it hard to determine the feasibility of such an investment. GII doesn’t deem such responsive investments to be viable. With every unique opportunity, characterized by steady cash and high capital protection, GII is ready to grab it.
The company boasts a perfect information flow, which is crucial in making decisions about real estate investment. For example, GII is less likely to invest in real estate that are characterized by high tenant turnover. Such kind of information requires that GII knows well its tenants and responds with readily available temporary or permanent equity. To be able to mine such specifically structure investment opportunities means that the company ought to place its targets beyond the GCC.
It is for this reason that GII positions itself as an equal partner to worldwide renowned developers that deal with large-scale commercial and residential projects. In June 2016, GII announced an acquisition of a Class-A Commercial Building in ‘3501 Corporate Parkway’ Pennsylvania in the United States of America. Constructed in the year 2006, the building stands on a 60,000 square feet plot of commercial land. The building cost GII investors and partners, 48 Million Dollars with part of the acquisition being funded by a loan obtained from a reputable bank.
According to the Company’s media report released in June 2016, the building is rented out to Dun and Bradstreet Corporation. The company views this breakthrough as the beginning of spreading its operations in the United States as well as the United Kingdom. In a statement made by Co-Founder and Co-CEO, Mohammed Al-Hassan, it can be derived that the company has developed enough stamina to take on mature investment markets like in the United States of America. GII focuses to spread even further.
There are underway plans to expand the real estate market in Europe, and Germany. According to a statement by the company’s cofounder, Pankaj Gupta, development opportunities in the European region are yet to be fully exploited by the GII. Even though the company seeks to conquer foreign markets, there lies a lot of potential in the UAE’s real estate market. Specifically, in Dubai, market prices are showing signs of stabilization, which is conducive for investors to thrive in.
In Dubai alone, real estate transaction volumes have increased by 50% over the last one year (Augustine 2014). The market, however, has not performed beyond peak sales reported in 2008. Financial analysts in the UAE believe that foreigners are contributing to the poor performance of the real estate market. While national companies like the GII will carefully trade through risk to grow and maintain their investments, foreign investors in the UAE are willing to undertake big risks and dispose of their investments in case of underperformance.
This phenomenon has a general effect on the performance of the company. There lies every reason why GII is biased in investing within the UAE as opposed to foreign markets. UAE’s economy is experiencing healthy growth, hence supporting development in sections of the economy like the real estate. Even though economic turmoils are evident, there is a lot of positive news slow to lean to (Kabel 2014). In May 2015, GII announced the acquisition of a staff accommodation building in Dubai Investment Park.
The 241 room property cost GCC investors 50 Million USD (Kabel 2014). Mohamed Al-Hassan, the Co-founder described the investment as a low-risk asset characterized by a high yielding potential. As it is the tradition of the private company, investors’ returns remain a paramount concern. Putting into risk investors’ contribution is not part of what GII operates on. Mr. Mohammed noted that the Dubai Investment Park acquisition is expected to yield a total of 46% Return on Investment (GII, 2015, p. 2). If the actual return surpasses the figure stated before, efforts by the company’ board of management are highly commendable.
Venture Capital
GII prefers to launch new projects from the ground as much has it finds well-established ventures attractive. Getting to invest in profitable ventures requires that a company is well informed of market developments, changes or technological advancements that can present opportunities. GII utilizes this approach to identify a return compelling investment, an arbitrage opportunity, a unique asset to be leveraged, a disruptive business model or proven technology.
Focusing on technology, innovative projects that employ technology to reduce risk or de-risked in nature offer investment opportunities especially in the early stages of establishment. However, some companies offer opportunities for investment in their late stages of growth. For example, when a company breaks into international markets, there are perfect opportunities. GII considers exploiting such an opportunity for example in establishing manufacturing, commercial, distribution, or franchise businesses.
Infrastructure
Infrastructure is the backbone of every economy. Being part of infrastructure development gives a company a major presence in the economy. In every target market, there arises a need to develop infrastructure and contribute to the GDP of companies. GII focuses on improving infrastructure in several sectors of the economy in its target markets. The following infrastructure sector is of interest to GII. In transport and logistic, roads, ports, and logistics hubs are the kind of infrastructural investment that GII shows interest in.
Social, and tourism infrastructure are also sectors that show attractiveness to GII investment focus. Just like real estate, the company finds the need to invest in other regions beyond GCC. GII has established a reputable relationship with institutional and private investors. GII has invested in infrastructure, specifically in Africa. The economy of Africa continues to lag because of several reasons and one of them being poor infrastructure. According to September 2015 press release, GII has been able to extend its operations into Africa.
GII Tech
GII‘s venture fund, GII Tech is primarily based in the United States. This segment deals with the technology domain for the company. GII Tech is leaned unto innovation. In March 2016, GII announced Series D funding for Valancell. Valancell deals with biometric sensor technology. Valancell hopes to continue with its innovations on wearable biometric devices. As a company, Valancell has continued to experience growth in demand for its highly accurate biometric sensor technology.
The company enjoys high growth rate with 2015 marking the second time for a consecutive triple-digit growth. According to Pankaj Gupta, CEO at GII, Biometric sensors have become fundamental features in the wearable and hearable devices. Valancell has already established itself as a competent innovator in biometric sensors.
As early stated, Valancell has received significant funding that will go far into supporting growth objectives to exploit the growing market demand. One of the most recent technological advancements for Valancell is Bio-Pack (GII TECH 2016). This innovation presents ready to integrate Perform Tek technology. Of relevance to this analysis is the new investment dynamic that GII is moving into. It is evident from the above analysis that biometric sensors transactions stand to benefit Valancell as well as GII’ Tech.
Away from the above-discussed investment areas, GII has thrived in other crucial sectors like Education. In a newsletter published in 2014, GII management terms education in the GCC, MENA and Africa a major societal and economic challenge currently and decades to come. Education has been linked to several economic challenges in the above-stated areas. In GCC, the rate of unemployment is rapidly increasing, and the major reason being limited education opportunities with the young population.
To address the situation King Abdullah of Saudi Arabia accredited an educational plan worth more than 21.33 Billion Us dollars (GII 2015). GII has also partnered with C Education and Technologies, a company leading in end to end; technology-enabled education solution providers operating in primary, secondary and tertiary levels of education. The partnership agreement entails education in general financial advisory, promotional of CORE’s business and corporate development in MENA and Africa.
A press release report as on May 18, 2015, hinted at the company’s interest in GCC Food Production and Food Service Industry. Executives in GII consider the food industry to be a profitable venture that is constantly growing tremendously. The food industry in GCC is backed up with the food ingredient trading industry. The company hopes to establish food retailing points in GCC and also to buy out existing food ventures. Being a funding company, GII will offer equity to promising food processing companies.
The food industry promises another investment sector for Gulf Islamic Investment Company. By September, 13 of 2015, a press release by the Gulf Investment Company hinted on a closed deal following reports on acquiring of MIF Inc. The Company is reputed for its successful establishment of UAE’ casual dining restaurants. MIF boasts ownership of More Café and Little More casual dining restaurant brands. Following the acquisition by GCC investors with the advice of GII, Mohamed Al-Hassan applauded the food industry.
The CEO and co-founder described the food sector as one that offers investment immunity (GII 2015). It can be interpreted that the company seeks diversification to avoid poor performance in the event of challenging economic times. Mohamed hinted at plans to expand operations for both More Café and Little More regionally. With a team of world-class business moguls, the board of directors is entrusted to oversee performance on international scales. As discussed above the company identifies opportunities that are viable and strives to develop profit for its investors.
The company has recently identified a shortage of gas cylinders in the GCC. According to a company report, the demand for gas cylinders is set to increase from the current 17 million gas cylinders demand to 20 million by the year 2020. There arises a need to increase production capacity for gas cylinders in the GCC. The demand for gas cylinders is on a worldwide scale.
Strategic positioning of the GCC as well as the natural potential to produce oil presents a viable opportunity that the GCC should exploit in time. To ensure profitability from the upcoming gas supply by the GII, new technological gas transportation means will be sought. The company hopes to employ virtual transportation means, which are much cheaper as compared to traditional transportation.
Figure 1: Pie Chart Showing Transactions Closed by GII
The above analysis involves several of the transactions close by the company. The pie-chart shows transactions closed regarding asset acquisition in the amount of acquisition.
The following transactions are in progress.
Coastra Oasis- Luxury Retail warehouse
Undisclosed Amount
Tadwir-E
60 million Dollars
Building Material Company
19 million Dollars.
Figure 2: Transactions in Progress
Conclusion
From the above analysis, it is evident that GII is expanding its territories beyond GCC. It is stipulated to increase value for investors considering the new sectors that the company has opted to thrive. Several observations draw interest as one goes through the company analysis. The first one is how Gulf Islamic Investment has managed to diversify its portfolios. Ranging from technological investments to the food industry, the company seeks risk reduction. Worthy to note is how GII guards investors” investment.
Even though opportunities are openly resentful for the company to seek both in the UAE and international markets, the Company focuses on the risk level and returns on investment. Interestingly, the company through its management team manages to identify probable investments and duly advise its investors. Even though the company needs to extend its operations into the international real estate and other markets, UAE bears unimaginable potentials. The economic performance of the UAE for the last few years indicates that real estate and other sectors are yet to reach their potentials.
Research Question
A research question will be important in the investigation of returns of both the private equity and the S&P 500. As such, the study will use the following research question to help in achieving the study’s objectives: Which is the better investment management strategy between S&P 500(index funds) and private equity funds for the investors?
Research Objectives
Based on the research question outlined above, the study will seek to fulfill the following objectives:
To determine which is more effective for investment between S&P 500 index funds and private equity funds.
To find out the advantages and disadvantages of private equity funds.
To find out some of the advantages and disadvantages of S&P 500 index funds
To examine the returns of investing in either private equity funds or S&P 500 index funds.
Literature Review
The focus of the study will be on the returns of private equity funds and the S&P 500. As such, this section of the paper will provide an in-depth review of related literature on the phenomenon under study to ascertain which of the two is likely to have better returns. To achieve the objectives of the study, various studies will be reviewed. As such, the literature review will be based on key concepts, theoretical research, and empirical studies to critically examine all aspects of private equity funds and S&P 500 index funds.
The current literature review dwells on the peculiarities of private equity and S&P 500, contrasts them and compares them in terms of their relation to the market and profit levels. This review provides relevant information on the current issue and helps understand the existing trends. Private equity (PE) is possibly the one benefit class to have practically regularly outclassed the S&P 500 during the last twenty years.
A past performance like that is impossible to overlook. Therefore, private equity firms are currently a $40 billion-a-month trade that has become a giant, notable aim. The business encounters several trials from retirement funds and coverage businesses, which are amid the major stockholders or limited partners (LPs). Some limited partners are attempting to convey more profitable contract terms, resultant in lesser disbursements to the PE associates. A limited number of others are attempting to remove private equity firms from the business image completely and make turn-around funds themselves.
One of the major problems upsetting the trade comprises the limited partners’ hard work to get the most out of the private equity under more promising negotiations, basically by eradicating PE companies as the retailer. Presently, private equity organizations, like companies in venture capital, regularly charge a couple of dissimilar payments. The foremost – a fixed fraction of the overall quantity under administration. The subsequent – a part of incomes made from a contract, succeeding a withdrawal (auction of a portfolio establishment by the private equity firm), assuming those incomes reach a convincing brink.
Private equity funds
Investors of private equity funds carry out their investments via a partnership structure that is limited and whereby the general partner is the concerned private equity firm. In this kind of an arrangement, the limited partners are wealthy individuals and institutional investors whose primary responsibility in the provision of capital. In return, the general partner carries out various investments using the committed funds. Often, the limited partnership under the class of private equity funds has a finite life, after which the general partner is required to acquire subsequent commitment funds.
According to Jones (2009), private equity returns can be categorized according to individual investments’ economics in any given company. The volatility of the returns decreases with stages (Shankar 2007). Nevertheless, most private equity deals are affected the macroeconomic conditions as well as the level of competition experienced in the private equity funds industry, and subsequently, affect the level of returns from investments involving private equity funds.
There has been tremendous growth in the private equity sector, especially venture capital over recent years. For example, the empirical literature shows that there was less than $10 billion in terms of commitment among investors within the private equity sector in 1991. However, nine years later, over $185 billion were used in private equity funds (Jones 2009).
Such a high increase in the amount committed by investors can be attributed to the availability of abundant information on returns from many private equity funds. Even though private equity funds have a heightened rate of returns, a fact that has increased the popularity of this type of asset class, information on the dynamics of private equity is scarce. This scenario has been heightened by the unavailability of the necessary data because most private equity firms do not disclose their information to the public as in the case of public firms.
Although private investments have a low volatility when compared to the public equities, they exhibit a high performance. There are various categories of private equity investments and thus can be categorized as public-traded equity investments’ complementary or even as supplementary to other types of investments. The success of private equity investments in the future cannot be evaluated based on past performance (Shankar 2007).
The application of private equity funds as either supplementary or complementary investment brings the possibility of reducing the volatility of the overall investment portfolio by either setting up suitable avenues to maintain or improve returns. As pointed out earlier, the percentage of returns received from any private equity investment is affected by actual circumstances. This is attributed to the fact that the private equity asset class is not homogeneous.
In 2013, Fevurly researched the private equity market and drew several conclusions concerning the current standing of the trend and its future implications. The range of private equity and PE reserves is hypothetically very profitable (representing the probability for tremendously high revenues) but awfully perilous (not for the weak companies) (Fevurly 2013).
Private equity commonly purchases distraught private (non-visibly dealt) commerce, positions them in a deposit accessible to affluent stockholders, and tries to recover those businesses monetarily before showing them to the public — that is to say, appealing to the initial public offering (IPO) of the stocks (Fevurly 2013). A section of private equity companies similarly capitalizes in start-up dealings and is identified as project businesspersons.
For the reason that distinct stockholders in private equity assets are principally qualified stockholders (stakeholders with a net worth of no less than $1 million, not including home fairness), it is suitable that private equity and private equity funds subsidize the theme of masterfully allocated resources for the depositors of high-net-worth organizations (Fevurly 2013). As a consequence of the scarcity of specific depositors with the mandatory investment to supply the PE and its reserves, the business chiefly is contingent on official investors, such as retirement funds, to deliver wealth.
Standard and Poor’s 500 Index funds (S&P 500)
The Standard and Poor’s 500 funds refer to an index that comprises of some of the largest companies in the U.S that are either listed on NASDAQ or the New York Stock Exchange. The eligibility of any company to be in the S&P 500 index is determined by the company’s level of market capitalization. In the U.S, the Standard and Poor’s 500 Index funds are used to measure the level of the equity market in the country.
Investors in S&P 500 Index funds enjoy the privilege of establishing major allocation in equities since such funds have the ability to replicate the performance and operations of benchmark Index through investments in constituents of S&P 500 that have equal weights in the market.
Basically, the S&P 500 make use of the passive investment approach. As such, the S&P 500 is passively managed and depends on the conception that the market is efficient, and the stock would always operate at a fair price which might reflect all available market information. Therefore, the passive manager would not look into the individual firms or securities. According to Hebner (2006), a passive fund manager holds all the bonds and stocks in a specific market, and they do not invest by tasking personal judgments or analyzing market forecasts.
Thus, an index fund or a large-cap passive fund can hold all 500 stocks in the S&P 500 Index as the manager only makes adjustments to the fund for reflecting changes in the index. On the other hand, Shankar (2007) stated that very low fees are associated with the S&P 500 as there is no requirement to assess the securities in the index.
Thus, the investors make their own decision whether to buy or sell the stocks in a specific market. Moreover, investors would have full information about the bonds or stocks that are contained in an indexed investment. Also, since the buy and hold style of index fund does not ensure high annual capital gains tax, it is considered tax-efficient for the investors.
Often, the index funds track an index or a target benchmark rather than searching for winners and hence, lower operating costs and lower fees when compared to private equity funds. By tracking an index, it becomes easy to ensure returns are in line with the overall market performance. Despite this, Roth (2010) pointed out that index funds are risky. This is attributed to the fact that the entire market is tracked by the index funds implying that if there is a fall in the overall bond prices or stock, then there would be a decline in the index too.
In 2011, Green and Jame researched to scrutinize the trades of key capitals and additional organizations accompanying the S&P 500 index add-ons. They found that index capital began re-harmonizing their selections with the declaration of configuration deviations and did not completely formed their positions up until weeks after the actual day and time (Green & Jame 2011).
Swapping away from the actual date turned out to be more dominant for the frameworks with lesser indicators of liquidity and amid great index capital, which was in line with the index capital longsuffering a sophisticated tracking fault to drop the price effect of the trades. Minor and average-cap assets added liquidity to index capital around add-ons and provided ordinary shares with a bigger percentage of the expected liquidity providers causing inferior enclosure earnings (Green & Jame 2011).
Measure the performance and Liquidity
In both the types of managing funds, private equity and S&P 500, the performance is measured by how much return is received by the investors after a set period. It is studied that as the individual manager seeks to outperform market index then the index is set as a benchmark by the managers so that the investors can earn higher returns. However, if the market is not in favor then it may limit the performance of managers to outcast the market (Redhead, 2008). On the other hand, in the case of the S&P 500 investment, the investors focus on matching the performance of the market to gain expected future returns.
Also, the success rate is calculated which indicates that the amount of actively managed funds that generated returns over those produced by the average passive fund in the same period (Swensen 2009). This helps in measuring the performance of both the funds. According to Hebner (2006), despite mixed performance in the recent years, more capital has moved to passively managed funds in 2014-2015 than actively managed funds. In 2015, there was a total of $413.8 billion invested in index funds, which marked a withdrawal of $207.3 billion from the mutual funds.
Also, in 2014, passive US equity fund inflows were $166.6 billion. On the other hand, lack of liquidity in the market may not be an issue for the investors as the general partner ensures that there is effective management of large cash in comparison to the case of index investors (Roth 2010). Additionally, any cash held in terms of bonds can be reinvested, especially in cases when such cash is liquid. In the case of S&P funds, investors are offered passive funds at a low cost to boost their investment.
In 2013, Jenkinson, Sousa, and Stucke assessed the performance of PE funds and the variables that affect the performance the most. The definitive performance of PE assets is only recognized as soon as all reserves have been traded, and the money was refunded to stockholders. This characteristically happens during ten years. In the intervening time, the testified routine is subject to the estimation of the residual group businesses. PE household marketplace is one of the constant funds.
This assumption was made on the base of the provisional estimations of the existing fund (Jenkinson, Sousa & Stucke 2013). In this paper Jenkinson, Sousa, and Stucke came to the agreement that these assessments are reasonable, the scope of conventional or belligerent assessments diverge throughout the lifespan of the supply, and discovered at what phase the short-term performance procedures envisage the definitive performance.
The researchers have as well used the trimestrial estimations and cash flows for the whole history of almost 800 deposit stashes enacted by Calpers – the principal US depositor in the PE sector. There were several main discoveries of the study. Primary, throughout the whole lifecycle of the deposit the researchers found evidence that deposit estimations are conformist, and have a tendency to be flattened (comparative to the activities in free marketplaces).
It was found that estimates minimize the succeeding dispersal by almost 40% normally (Jenkinson, Sousa & Stucke 2013). Jenkinson, Sousa, and Stucke found a noteworthy jump in estimations in the last quarter when resources were typically inspected. Additionally, the exemption to this overall traditionalism was the interval when secondary assets were being raised. They found that assessments, and testified earnings, were exaggerated throughout the fundraising period, with a steady setback as soon as the consequent deposit had been locked.
As an extra, Jenkinson, Sousa, and Stucke discovered that the performance statistics testified by the assets all through the fund-raising had diminutive control over envisaging the final revenue numbers. This was particularly accurate when performance was evaluated by the Internal Rate of Return (Jenkinson, Sousa & Stucke 2013). Utilizing public marketplace comparable procedures had improved the predictability expressively. Their outcomes displayed that the stockholders should be tremendously suspicious of founding venture verdicts on the revenues – specifically Internal Rate of Return – of the existing deposit.
Comparison between private equity and S&P 500
Dunn (2011) noted that private equity investments aim at selecting securities that would outperform the market, thereby gambling across comparatively few securities. The implication is that a wrong choice of stocks would lead to significant underperformance of the involved firm. On the other hand, passively developed portfolios could be more diversified and would enclose thousands of shares/securities allocated among different investment groups ensuring the generation of more returns with lower volatility.
Swensen (2009) opined that in S&P 500, tracking an index would not be safer for the investor as the funds match the upswing in a bull market and money is lost by the investors in a down cycle as they remain stuck to the index despite taking action to decrease risk. In certain niche markets, where assets are less liquid, it becomes hard for investors to buy securities while it is not the same in the case of private equity funds.
The earnings of short-range setback tactics in equity markets can be understood as a substitution for the revenues from liquidity provision. This policy is a robust indicator of the fact that the income from liquidity provision is extremely foreseeable. The VIX index may be used to predict the revenues. Projected incomes and provisional Sharpe proportions from liquidity provision (LP) intensify throughout the intervals of economic market disorder (Green & Jame 2011).
The outcomes indicate the extraction of liquidity stock and an accompanying growth in the anticipated revenues from liquidity provision as the key motivator behind the fading of liquidity all through the periods of financial market chaos, along with the concepts of liquidity provision by monetarily limited mediators. There is also an indication of the fact that some shared assets steadily take the role of contrarian brokers, and produce revenues in the stock marketplace by offering liquidity to the stockholders, although others methodically claim liquidity and experience the expenses of proximity (Green & Jame 2011).
Averagely, the joint funds’ expenses of proximity outdo their revenues from offering liquidity. The capitals with leakages, currents that connect to the trade currents, top marketplace beta assets, and the resources extremely exposed to the impetus approach experience the biggest losses regarding proximity. The joint assets’ usual deficit can be explicated with their costs of proximity. To conclude, the deposits’ past spendings on the proximity envisage their alphas. A shared asset’s stock choice expertise can be disintegrated into supplementary units that contain liquidity-captivating exasperated swapping and liquidity provision (Green & Jame 2011).
It was eventually found that historical performance foresees the forthcoming performance better amid resources interchange in the markets impacted more by informational happenings. Former front-runners get a risk-accustomed post-remuneration extra return of 40 base points each month. The majority of that great performance originates from the exasperated interchange (Green & Jame 2011). Exasperated trading is vital for the funds that are focused on growth, and liquidity provision is the key approach for the newer revenue assets.
Franzoni, Nowak, and Phalippou stated in their 2012 research that PE has conventionally been believed to deliver variation benefits. Nevertheless, these benefits may be lesser than expected as Franzoni, Nowak, and Phalippou discovered that private equity agonized from a substantial contact with the identical liquidity risk aspect as PE and other different benefit categories (Franzoni, Nowak & Phalippou 2012).
The unqualified liquidity danger upper limit is nearly 5% per annum and, in a four-feature classification, the insertion of this liquidity risk upper limit condensed alpha to nothing. Additionally, they indicated the fact that the connection between PE earnings and general marketplace liquidity arises using a capital liquidity channel (Franzoni, Nowak & Phalippou 2012).
Private Equity Liquidity in the Secondaries Market
The typical revenue on bonds with exceptional sensitivities to collective liquidity surpasses that for bonds with trivial sensitivities by approximately 5% per annum. The constructive correlation between the projected company bond earnings and liquidity is vigorous to the impacts of the defaulting and intermittent betas, liquidity extents, and other crucial features, along with the dissimilar archetypal conditions, test procedures, and an assortment of liquidity trials (Franzoni, Nowak & Phalippou 2012).
Liquidity risk is an imperative factor of predictable business bond revenues. The banks that depend more profoundly on the fundamental credit and equity investment backing, which are steady bases of sponsoring, kept on loaning comparative to other banks. The banks that seized more illiquid resources on their profit and loss accounts, on the contrary, improved the resources liquidity and condensed loaning (Franzoni, Nowak & Phalippou 2012).
The liquidity risk appeared on the profit and loss account and forced new credit initiation as an amplified takedown request banished the loaning capacity. The exertions to deal with the liquidity crisis ended up in decay in credit stock.
Private equity deposit liquidity is apprehended by the number of tenders, their discrepancy, and a superfluous demand for a supply interest; all assessed utilizing the sale data offered by a big advice-giving organization (Franzoni, Nowak & Phalippou 2012). Moreover, a private equity supply interest is more liquid if the deposit is bigger, has a takeover-intensive approach, less unstrained assets, has made fewer supplies and is ruled by an executive whose resources were formerly traded in the secondaries marketplace.
Private equity deposits’ liquidity recovers if more non-customary purchasers, as in opposition to the steadfast secondary assets, offer tenders, and the inclusive marketplace environment is positive (Franzoni, Nowak & Phalippou 2012). In conclusion, the liquidity substitutions are meaningfully and certainly related to the ultimate tenders at which the private equity deposit interests are traded, compared to the typical marketplace offers. The most important private equity deposit features affect their marketability and that liquidity is estimated in the engaging secondaries private equity marketplace propositions (Franzoni, Nowak & Phalippou 2012).
In 2014, Harris, Jenkinson, and Kaplan analyzed the performance of almost 1500 United States takeover and undertaking investment funds using a novel fact sheet from Burgiss. They discovered an improved takeover deposit performance when compared to the formerly recognized performance that had constantly topped that of public marketplaces. Private equities managed to outperform the S&P 500 by 25% when considering a fund’s lifespan and more than 3% per annum (Harris, Jenkinson & Kaplan 2014).
Venture assets capital topped public equities at the end of the 20th century but lost its crown with the beginning of the 21st century. Harris, Jenkinson, and Kaplan’s suppositions are built on numerous aspects and risk assessments. Their research also showed that Venture Economics has the lowest signs of performance amid similar businesses. Performance in Burgiss and Preqin was specified to be on a relatively similar level (Harris, Jenkinson & Kaplan 2014). The major private equity businesses are on the point of continuing to nurture in dimensions and reputation.
One of the key motives for this is that autonomous capital reserves in Asia and the Middle East, which stereotypically capitalize in the best interests of a government, are paying attention to the trophy titles in private equity and are reluctant to have confidence in their cash with a minor, not as much of familiar organizations (Harris, Jenkinson & Kaplan 2014).
In their 2012 study, Higson and Stucke presented convincing indications on the effectiveness of private equity, utilizing a high-quality fact sheet of deposit cash incomes that covered approximately 88 percent of the overall assets ever upstretched by the United States takeover resources. For nearly the last four decades, takeover resources had suggestively outdone the S&P 500 (Higson & Stucke 2012). Liquidated capitals from the last two decades of the 20th century have distributed extra revenues of approximately 465 base points in a year.
Higson and Stucke considered accumulating the moderately liquidated reserves up to the middle of the 2000s; this resulted in the fact that the surplus revenues rose to over 800 base points. It was as well found that the cross-sectional discrepancy is substantial with slightly over 62% of all assets doing much better than the S&P. The surplus earnings were proven to be determined by monthly variations instead of trimestrial capital.
The researchers also documented an exciting periodicity in revenues with considerably higher numbers for capitals set up at the beginning of each of the previous three periods, and consistently lesser earnings on the way to the end of each period (Higson & Stucke 2012). Still, they found a noteworthy descending tendency in total revenues over all three decades from the 20th century.
Higson and Stucke’s results turned out to be robust to calculating superfluous revenues using money multiples as a replacement for the Internal Rate of Return and were fundamentally unaffected when pricing remaining values at the detected subordinate marketplace markdowns. Limited partners are making an effort to make these standings more beneficial in binary ways (Higson & Stucke 2012).
The primary is by co-participating. This depicts, for instance, that if a private equity business is forming a merger of a public corporation, the limited partners will contribute unswervingly to the deal as an extra stockholder but without their capitals being dependent on the standard private equity firm charges. They would, in force, produce any revenues from the deal without having to cut their share (Higson & Stucke 2012). After the time interval of strong development, the private equity trade has gone through a noticeable deterioration.
Currently, the future of the undertaking and acquisition businesses appears to be uncertain (Lerner 2010). There are four probable set-ups for the future of the PE commerce that were outlined by exploring the determining factors of PE stock and demand. Even though each of the set-ups is backed with the supporting evidence, coming up with an estimate for the future remains problematic (Lerner 2010). The convenience of the private equity marketplace is on the verge of being the topic of discussion for a long time.
Modern Portfolio Theory
The theory presents a notion that risk-averse investors can develop portfolios for maximizing their expected return. Constructing an efficient frontier of optimal portfolios can offer maximum potential expected returns to the investors for a given risk level. Moreover, by using this theory, the investors can decide whether private equity funds or S&P 500 would ensure better return with less risk in a particular period.
Since the stock markets are efficient, no investor, manager or analyst can use the information which may allow them to outperform the market of other investors over time. Elton, Gruber, and Goetzmann (2009) asserted that there is a common assumption that investors are rational in making investment decisions. Passive management is more efficient and could provide better returns.
For most depositors, the risk they take when they purchase an ordinary share is that the income will be lesser than projected. To put it differently, it is the deviation from the normal revenue. Each ordinary share is represented by its standard deviation from the mean, which modern portfolio theory calls a risk. The risk in a portfolio of miscellaneous separate stocks will be less than the risk integral for possessing any one of the discrete shares (on condition that the risks of the different stocks are not directly connected).
In the case, if there are two risky stocks in the portfolio – one that repays when the situation in the market is stable and another that reimburses when it is not – the portfolio that holds both assets will continuously payback, irrespective of whether the situation is good or bad. Joining one risky benefit with another can decrease the global risk of a portfolio that covers all the possible circumstances. It has been proved that venture is not simply about selecting shares, but about picking the correct amalgamation of stocks among which to allocate one’s reserve.
Research Methodology
This section provides details of the techniques to be used in collecting and analyzing the necessary information for the study.
Research Philosophy
A research philosophy can be positivism, realism, interpretivism or pragmatism.
In this study, the positivist philosophy will be used to determine the link between the private equity funds and the S&P 500 and to know which fund can be most effective for the investors to generate better returns. As a philosophy, positivism follows the opinion that only accurate data attained via observation, together with measurement, is truthful. In this positivism research, the role of the investigator is limited to data gathering and clarification using unbiased methods and the research discoveries will be apparent and measurable.
Concerning the comparison of private equity and S&P 500 indexes, the positivism relies on measurable observations that guide themselves to numerical examination. It should be distinguished that as a viewpoint, positivism is consistent with the pragmatist opinion that knowledge is essentially based on the human experience. It features an ontological interpretation of the subject as embracing distinct, apparent elements and events that intermingle in an obvious, resolute, and consistent manner.
Furthermore, in this particular positivism study, the investigator is not dependent on the study and there are no requirements for human interests within research. Moreover, this positivist study will implement the deductive approach. There is also an inductive research approach that is typically connected to phenomenology. Besides, positivism is mostly associated with the viewpoint that the investigator will need to focus on the facts, not on the connotations.
The author of this dissertation is not reliant on their research, and their research can be chastely impartial. “Not reliant” denotes that they sustain minimal contact with their research partakers when executing their research. To put it differently, this particular study (based on the positivist model) is founded purely on the evidence and expects the world to be unprejudiced. The five main principles of positivism philosophy in this study are the following:
There are no alterations in the reason of investigation across disciplines.
The research should focus on elucidating and forecasting.
Research should be empirically apparent using human intelligence. Inductive perception should be utilized to develop reports (theories) to be confirmed during the investigation course.
Knowledge is not equivalent to good judgment. The practicality should not be permitted to bias the study results.
Science must not be valued, and it should be mediated only by logic.
Research Approach
A study can use deductive, inductive or abduction approach in collecting the required information from various sources or even developing new concepts (Bergh & Ketchen 2006). The study will use the deductive approach to developing hypotheses based on existing literature on the study phenomenon.
The deductive approach is a top-down tactic that elucidates from the general to the detailed. In a pragmatic study, that defines that a market investigator initiates a study by bearing in mind the theories that have been elaborated in combination with an area of concentration (Private Equity and S&P 500 indexes). This approach permitted the author of the dissertation review the extensive research that has previously been conducted and establish an idea about outspreading or adding to that hypothetical basis. From the current point of view, the researcher works to establish whether private equity stocks are more profitable than the S&P 500 indexes.
This new supposition has been verified by the author in the course of directing a novel study. The explicit facts that have been gathered and investigated will arrange the foundation of the assessment of the proposition. It is substantial to signify that the hypothesis that has not been confirmed is not proven incorrect either.
Strategies
The validity of collected information depends on the research strategies adopted (Kumar 2014). In this study, an archival research strategy would be used to get the opinion of the investors and fund managers and what risks they face when operating investments either through private equity funds or index funds. This strategy is suitable for acquiring valid data for any study.
Primary, private equity is an impartial venture into non-quoted businesses. As the businesses are not operated on a subordinate marketplace like the stocks of openly registered businesses, there is no marketplace price presented on a systematic basis. On condition that the business is traded to another stockholder can factual market values be detected, but this archetypally only occurs after numerous years. Because of the deficiency of systematic marketplace prices, the distinctive and renowned risk trials of public marketplaces, such as instability or underperformance, cannot be utilized in private equity.
On account of this lack of obtainability of market values, deposit managers originate a value for each business using one of the trade’s typical assessment procedures (for instance, marketplace comparables or cut-rate methods). These are not marketplace values and are termed net asset values. Additionally, they are similar to accounting prices and are testified to depositors four times a year to offer them a suggestive price for their venture founded on estimates of the unrealized funds held.
Even if these net asset values are occasionally utilized to estimate a risk degree, it is central to understand that they are not founded on genuine marketplace transactions. Therefore, they can vary from impartial market prices. This will be examined in depth in further sections of the dissertation, but it is imperative to mention from the beginning that this distinguishing trait of private equity makes it problematic to measure marketplace risk for the benefit type effectively. Second, a distinctive retirement fund, insurance corporation, or any other place of work does not capitalize straight into a business.
Predominantly, a deposit is utilized as the venture mechanism for the reason that the expert fund supervisor has both the skill and knowledge to find and pick the funds, manage them enthusiastically, regulate the policy of the corporation to create more profit, supervise the business, and trade it after a normal holding interval of five years.
The usual venture is done via a limited partnership assembly. At this point, depositors are the limited partners (LP) who pledge an expanse of assets at the beginning of the lifecycle of the enterprise with the lawful responsibility to recompense this investment into the deposit on every occasion the fund supervisor (General Partner) demands it. When the deposit manager has recognized an attractive venture prospect in a corporation, they will get the assets from the stockholder.
Usually, this will be performed throughout a 5-year outlay period. Subsequently, the venture will be held and withdrawn. Altogether, limited partners’ assemblies have a tendency to be arranged for a long-standing prospect of at least a decade with no recovery rights for depositors. They can only attempt to discharge their stake at the inferior marketplace for – contingent on the market state of affairs and peripheral aspects – a hypothetically big concession, owing to the illiquidity and disorganization of this marketplace.
Moreover, sales consultations can naturally take more than a few weeks before the parties agree. Intrinsically, a stockholder in private equity can track the dangers of liquidity. Last, of all, a depositor does not put in all of their assets on the opening date; instead, the cash is taken from the deposit over time. This embodies a definite risk for depositors, which is a consequence of the archetypal fund design. If the stockholder is not capable of paying the investment call consistent with the standings of the partnership arrangement, they default on their reimbursement.
In this situation, the stockholder might miss the whole venture and all the money which they already invested into the deposit. Numerous fund managers have severe guidelines in their Limited Partnership Arrangements on the occasion of a defaulting depositor. Archetypally, the depositor will lose their whole venture. In some cases, they still embrace the legal responsibilities. This firm apparatus is central for the fund manager as they are required to have the maximum imaginable security to fund the reserves they would not mind to attain.
On top of the risk of not being capable of gratifying their undrawn obligation, each stockholder can be unfavorably obstructed as an outcome of other depositors’ defaulting. This is why liquidity and capital risks ascending through unfunded pledges are an imperative component and have to be replicated in complex risk managing structures.
Numerous stockholders incline to make the S&P 500 Index the mainstay of their outlay portfolio. Others utilize the S&P 500 as a standard to evaluate the wellbeing of the marketplace or their outlay selection. This is a very dangerous approach that significantly upsurges the danger of failing to reach the economic objectives. Reviewing the S&P 500 is important before capitalizing on the withdrawal in a joint fund founded on the S&P 500. The experts do not advise the clients using index funds founded on the S&P 500 as the pillars of their portfolios for the reason that it is too perilous.
Those who have carefully chosen such a deposit as the main share of their IRA have to comprehend the venture strategy they have approved. S&P 500 assets capitalize most of their resources in a handful of businesses. Many individuals are certain of the fact that when they purchase $1,000 of the S&P 500 they are obtaining $2 of each of 500 businesses.
This is not correct as the S&P 500 is a capitalization-biased index that is not financed consistently. First, the S&P 500 index is only profitable when major corporations are prosperous. Additionally, the index embodies momentum financing. As a stock upsurges in value, it is more seriously weighted and therefore characterizes more of the individual’s venture. Third, as one certain business does fine, the revenues of the index tend to be more meticulously tied to how that business performs at some point.
And lastly, the index characterizes development capitalizing because it surpasses stocks founded on their value, not founded on their incomes. It capitalizes more on stocks that are more expensive but see more profit than the cheaper ones. The S&P 500 recompenses for previous growth and existing assessment, not the upcoming development – the intelligent objective of the stockholder.
This proves to be much more important than the high-priced shares in the S&P 500. These features are an inevitable module of the way the S&P 500 is established. According to one of the experts, if the S&P were a fiscal consultant it would recommend buying typically big cap growth shares in the business that performed nicely last year with a high price per income proportion. This information ends up in a very belligerent and very unstable portfolio that does better towards the end than the launch.
Data Collection
A mixed-methods design will be used in this study to ensure the collection of both quantitative and qualitative data. Various past studies will be reviewed to obtain the necessary data on the two classes of assets. Thus, credible secondary sources of data such as journals will be used for this study. This will be done through examining trends in the use of private equity funds or index funds to ascertain which investment management fund has shown growth and has been accepted by the investors.
The results are going to be upsetting at protecting the assets all through a tolerant market – exactly what occurred during the last five years. In 1999 the S&P 500 grew 22%, but the majority of the shares in the catalog decreased. After realizing the technology shares advances, the S&P 500 grew slightly less than 7%. By early 2000 technology shares signified more than 30% of the backing of the S&P 500. These values were the best on the market, and no other business got on the level of technology shares. In 2000 when high cap progress shares dropped 35%, small-cap progress increased 19%, and in 2001 while high cap progress fell an extra of 19%, small-cap profit was still getting higher and grew another 18% (See Figure 3 for more info).
Figure 3. S&P 500 Annual Total Return Historical Data.
The shares market tendency was a high cap progress and consequently also an S&P 500 tendency. The NASDAQ catalog is even more unstable and experienced an even larger improvement. Those depositors, prudent enough to evade using the S&P 500 as their economic counselor, circumvented these great losses and well-maintained their beliefs. The up-to-date unfairness of the S&P 500 is the economic situation. The banks, loaning businesses, indemnification, and so on) currently signifies the major subdivision at 22% and nowadays denote more than 50% of the S&P 500’s incomes (more information on the performance of private equity compared to S&P 500 can be seen in Figure 4).
Figure 4. The performance of Private Equity funds.
Financials have had a fine gratefulness during the interval of dropping interest rates. But past profits are no promise of the upcoming performance. The companies have been taking those incomes and reducing on their venture in the economic segment at the particular interval when the S&P 500 has been growing theirs.
Whether or not growing interest extents will reduce, the imminent incomes of the economic division remain to be seen, but this signifies an amplified contact that S&P 500 stockholders haven’t measured. Energy shares, which denote about 20% of the incomes in the S&P 500, only contain 7% of the venture. This type of capitalizing underestimates the energy segment at a time when solid asset shares (oil, wood, precious metals) are on the rise.
To conclude, S&P 500 capitalizing fails to take into consideration the money and liability of a business even though these aspects are critical to calculating a corporation’s genuine value. If a business’s marketplace cap is $1 billion, but it has $500 million in currency and no liability, they are effectually disbursing only $500 million for the corporation for the reason that they are acquiring the company’s cash funds. These cost contemplations are gone in S&P 500 capitalizing (see Figure 5 for the detailed comparison between PE and S&P 500).
Figure 5. The performance of Private Equity funds against the S&P 500.
Trivial cap shares and value shares repeatedly do great throughout the opening of a market in increasing awareness rates. These are the factors that the majority of the companies are presently going through. It has frequently been mentioned that the typical profit of the S&P 500 has been flanked by 10% and 12% per annum. This has not changed for the last 65 years.
Nonetheless, it has only happened three times that the S&P 500 had an authentic income between 10% and 12%. Evaluated the opposing way, in 62 of the overall 65 cases, the incomes of the S&P 500 have been less than 10% or more than 12%. Factually, many individuals who have experienced a serious loss in their S&P 500 selection did not have the time to wait for a decade for their losses to recuperate. The training had to be rewarded, and withdrawal pronouncements had to be made.
The overall findings of this study show the evidence of the fact that companies should not count on the S&P 500 to be their fiscal counselor. The point is that the accurately differentiated portfolios that are prudently financed and skillfully managed have a better chance of accomplishing the company’s economic objectives and guaranteeing a reliably stable profit.
Ethical Consideration
Throughout the study, ethical code of conduct would be maintained. The participants would be completely informed about the purpose and nature of the study. Also, the voluntary participation would be sought. No individual would be pressurized to give their opinion. Additionally, the research would be carried out only for academic purposes and as an original piece of work.
During this research, participants were not exposed to damage of any kind. The author of this study made reverence for the dignity of research partakers their main priority. All participants of the research intricately realized what they had been explicated to. They got a chance to ask questions for the explanation, and the responses were provided by the researcher. All of the printed documents were read and comprehended by the contributors and, consequently, did not comprise any technical terminology unfamiliar to the partaker.
Full agreement has been obtained from the contributors before the investigation. One of the main points was the fact that the researcher ensured the protection of the privacy of research participants. The author of the study provided voluntary involvement of partakers in the research. Therefore, an acceptable level of privacy of the research data has also been guaranteed. The author of the study has also guaranteed the confidentiality of the organizations that contributed to the current research. Any dishonesty or overstatement about the goals and objectives of the study were evaded.
Connections of any kind, sources of subsidy, in addition to any probable conflicts of interests were acknowledged. All the communication regarding the research has been done with uprightness and impartiality. The author of this study managed to avoid all of the types of deceptive information, as well as the depiction of primary data discoveries in a prejudiced way. One of the most significant ethical considerations in this research was autonomy. Taking part in research was voluntary.
There were no embellished promises to entice a partaker or any form of pressure. The participants were permitted to converse whether they should go in for the role or not with their family or a person they trust before taking the role. The research was conducted professionally, consistent with the objectives and ethical contemplations that were set before the investigation. This conventionality guarantees the transparency and impartiality of the obtained results and verdicts that are to be reached.
The author of this research states that they were not part of anyway when conducting their study. Self-trickery was avoided in all conditions. Individual aspects that might have affected the research one way or another were also divulged. Every step of the research was taken accurately and thoughtfully. Errors ascending as a result of inattention or negligence did not occur. The author of the dissertation had critically reviewed the work they have done. Research events like communication, research strategy, and data gathering were well logged, described, and analyzed.
Time Horizons
Table 1: Gantt chart
Activity
Week 1-2
Week 3-4
Week 4-5
Week 5-6
Week 7-8
Week 8-9
Week 9-10
Selecting topic
Identifying research area
Preparing research proposal
Literature Review
Collecting secondary data
Analyzing secondary data
Survey
Evaluating the survey’s responses
Analyzing and comparing the results of the primary and secondary research
Final report
Resources
The table below highlights the budget for this study.
Resources
Cost
Indirect costs (databases, journals and books)
$ 20
Travel
$20
Stationery
$10
Total
$50
Recommendations.
This study might be advantageous for GII in terms of thorough insights into the stock market. The research is backed with both primary and secondary data and reflects only unbiased, objective data that is further interpreted by the author of the dissertation. These insights as well represent a benefit for the company regarding the investments made by the management. The paper must explain the differences between private equity and the S&P 500 index and follows the trends of both these notions.
The key factor in this situation is the relatively identical situation for PE and S&P 500 in the present market. Selecting where to invest the funds can be a tough question if there is no prior research on this subject. This is the supportive side of this dissertation as it helps understand the market and provides the readers with the authoritative opinion of the experts in the investment field.
The study also reflects on the detailed statistics of both private equity and S&P 500 and their performance over the last 25 years. This analysis provides GII with the current data that is relevant and useful. The experts provided information on the types of risks that might be encountered when investing the funds in PE and S&P 500 and dwelled on the complications that may arise during the stock funding. This dissertation is designed to help in deciding on the selection of the fund investing area and should be of great assistance to the GII company.
Conclusions
Private equity efficacy has been misinterpreted in some indispensable ways. It now looks as if the private equity business definitively outperforms the S&P 500 about risk-attuned revenues, which may motivate the organizational stockholders to distribute even more assets to this certain asset class. But this factual data comes with a remark. The topmost private equity companies now appear less up to generate reliably effective funds. That is partly for the reason that the accomplishment has become more autonomous as the overall level of capitalizing expertise has amplified.
The new significance of achievements is distinguished competences. Limited partners think assets that utilize a general partner’s characteristic strong points will excel, while more generalist tactics may be deteriorating from an errand. Organizational stockholders will have to bounce back at classifying and evaluating these skills, and private equity companies will want to look at the market to better comprehend and take advantage of the features that actually determine their performance.
Private equity has increased from the correspondent of 1,5% of the worldwide ordinary share marketplace capitalization in 2000 to approximately 4% in 2012. Since it has first appeared it resounded and smashed in conjunction with public markets, while inevitably captivating supplementary share. Simultaneously, it may be detected that private equity—though supposedly an alternate benefit class—has in two routes floated in the direction of the mainstream. Within the framework of this dissertation, it may be determined that approximately a decade ago private equity could not overcome the S&P 500 on a risk-attuned foundation as only a small number of businesses steadily beat the index.
It has also been found that private equity revenues have become extremely interrelated with public marketplaces. As the discernment of private equity’s distinction has diminished, the dues that the business charges stockholders, already stressed, have come to appear specifically excessive. And as businesses have come besieged for several of their practices, they have not always been successful in explaining their part to the community. These are grave trials but, if revenues are only typical, all of the above is not that important.
Private equity revenues are, nevertheless, especially problematic to estimate. As a rule, the business does not put out its outcomes. The data that are presented can be unreliable and hard to understand, as both PE businesses and their LPs exploit various methods for their estimations. What is even worse, the database on which academics have counted on turns out to have had thoughtful organizational problems. Reassuringly, this particular research founded on more topical and more constant statistics proposes that private equity revenues have been much better than formerly assumed, however, top firms’ efficacy is nowadays less reliable to a certain degree.
The conformist understanding of earnings comes from the examinations of assets raised in 1998 and before that date. It was found that resources formed since 1998 seem to have evocatively outclassed the S&P 500 index, even on a control-attuned basis. Over the long term, private equity revenues have outdone the S&P 500 index by no less than 290 basis points.
References
Augustine, B 2014, ‘UAE’s Real Estate Recovery is Supported by Solid Fundamentals: S&P’. [Online]
Bergh, D & Ketchen, D 2006, Research Methodology in Strategy and Management, UK: JAI Press.
Dunn, J 2011, Share Investing, China: Wiley.
Elton, E, Gruber, M & Goetzmann, W 2009, Modern Portfolio Theory and Investment Analysis, Delhi: Wiley.
Fevurly, K 2013, Private Equity Funds, The Handbook of Professionally Managed Assets, pp. 209-228.
Franzoni, F, Nowak, E & Phalippou, L 2012, ‘Private Equity Performance and Liquidity Risk’, SSRN Electronic Journal, vol. 67, no. 6, pp. 2341-2373.
GII TECH, 2016, Press Release: Valencell Secures $11 Million in Series D Funding, Abu Dhabi: GII.
GII, 2015, ‘Gulf Islamic Investments Concludes the Acquisition of More Café and expands its focus into the UK Real Estate’, Abu Dhabi: GII Media.
GII, 2015, ‘Press Release: May, 2015’, Abu Dhabi: GII.
GII, 2016, Home Page. [Online]
Green, T & Jame, R 2011 ‘Strategic Trading by Index Funds and Liquidity Provision Around S&P 500 Index Additions’, SSRN Electronic Journal, vol. 14, no. 4, pp. 605-624.
Harris, R, Jenkinson, T & Kaplan, S 2014, ‘Private Equity Performance: What Do We Know?’, The Journal of Finance, vol. 69, no. 5, pp. 1851-1882.
Hebner, M 2006, Index Funds, China: IFA Publishing.
Higson, C & Stucke, R 2012, ‘The Performance of Private Equity’, SSRN Electronic Journal, pp. 1-48.
Jenkinson, T, Sousa, M & Stucke, R 2013 ‘How Fair are the Valuations of Private Equity Funds?’, SSRN Electronic Journal, pp. 1-27.
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Kabel, J 2014, Sukuk Pipelin for This Year Looks Promising. [Online]
Kumar, R 2014, Research Methodology: A Step-by-Step Guide for Beginners, India: Wiley.
Lerner, J 2010, ‘The Future of Private Equity. European Financial Management’, vol. 17, no. 3, pp. 423-435.
Redhead, K 2008, Personal Finance and Investments: A Behavioural Finance Perspective, London: Routledge.
Roth, J 2010, Your Money: The Missing Manual, USA: O’Reilly.
Shankar, S 2007, ‘Active versus passive index management: A performance comparison of the S&P and the Russell Indexes’, Journal of Investing, vol. 16, no. 2, pp. 85-95.
Swensen, D 2009, Pioneering Portfolio Management, New York: Free Press.
The current literature review dwells on the peculiarities of private equity and S&P 500, contrasts them and compares them in terms of their relation to the market and profit levels. This review provides relevant information on the current issue and helps understand the existing trends. Private equity (PE) is possibly the one benefit class to have practically regularly outclassed the S&P 500 during the last twenty years.
A past performance like that is impossible to overlook. Therefore, private equity firms are currently a $40 billion-a-month trade that has become a giant, notable aim. The business encounters several trials from retirement funds and coverage businesses, which are amid the major stockholders or limited partners (LPs). Some limited partners are attempting to convey more profitable contract terms, resultant in lesser disbursements to the PE associates. A limited number of others are attempting to remove private equity firms from the business image completely and make turn-around funds themselves.
One of the major problems upsetting the trade comprises the limited partners’ hard work to get the most out of the private equity under more promising negotiations, basically by eradicating PE companies like the retailer. Presently, private equity organisations, like companies in venture capital, regularly charge a couple of dissimilar payments. The foremost – a fixed fraction of the overall quantity under administration. The subsequent – a part of incomes made from a contract, succeeding a withdrawal (auction of a portfolio establishment by the private equity firm), assuming those incomes reach a convincing brink.
Private Equity Funds
In 2013, Fevurly researched the private equity market and drew several conclusions concerning the current standing of the trend and its future implications. The range of private equity and PE reserves is hypothetically very profitable (representing the probability for tremendously high revenues) but perilous (not for the weak companies) (Fevurly 2013).
Private equity commonly purchases distraught private (non-visibly dealt) commerce, positions them in a deposit accessible to affluent stockholders, and tries to recover those businesses monetarily before showing them to the public — that is to say, appealing to the initial public offering (IPO) of the stocks (Fevurly 2013). A section of private equity companies similarly capitalises in start-up dealings and is identified as project businesspersons.
For the reason that distinct stockholders in private equity assets are principally qualified stockholders (stakeholders with a net worth of no less than $1 million, not including home fairness), it is suitable that private equity and private equity funds subsidize the theme of masterfully allocated resources for the depositors of high-net-worth organisations (Fevurly 2013). As a consequence of the scarcity of specific depositors with the mandatory investment to supply the PE and its reserves, the business chiefly is contingent on official investors, such as retirement funds, to deliver wealth.
Valuations of Private Equity Funds
In 2013, Jenkinson, Sousa, and Stucke assessed the performance of PE funds and the variables that affect the performance the most. The definitive performance of PE assets is only recognised as soon as all reserves have been traded, and the money was refunded to stockholders. This characteristically happens for ten years. In the intervening time, the testified routine is subject to the estimation of the residual group businesses. PE household marketplace is one of the constant funds. This assumption was made on the base of the provisional estimations of the existing fund (Jenkinson, Sousa & Stucke 2013).
In this paper Jenkinson, Sousa, and Stucke came to the agreement that these assessments are reasonable, the scope of conventional or belligerent assessments diverge throughout the lifespan of the supply, and discovered at what phase the short-term performance procedures envisage the definitive performance. The researchers have as well used the trimestrial estimations and cash flows for the whole history of almost 800 deposit stashes enacted by Calpers – the principal US depositor in the PE sector.
There were several main discoveries of the study. Primary, throughout the whole lifecycle of the deposit the researchers found evidence that deposit estimations are conformist, and have a tendency to be flattened (comparative to the activities in free marketplaces). It was found that estimates minimise the succeeding dispersal by almost 40% normally (Jenkinson, Sousa & Stucke 2013). Jenkinson, Sousa, and Stucke found a noteworthy jump in estimations in the last quarter when resources were typically inspected.
Additionally, the exemption to this overall traditionalism was the interval when secondary assets were being raised. They found that assessments, and testified earnings, were exaggerated throughout the fundraising period, with a steady setback as soon as the consequent deposit had been locked. As an extra, Jenkinson, Sousa, and Stucke discovered that the performance statistics testified by the assets all through the fund-raising had diminutive control over envisaging the final revenue numbers.
This was particularly accurate when performance was evaluated by the Internal Rate of Return (Jenkinson, Sousa & Stucke 2013). Utilising public marketplace comparable procedures had improved the predictability expressively. Their outcomes displayed that the stockholders should be tremendously suspicious of founding venture verdicts on the revenues – specifically Internal Rate of Return – of the existing deposit.
Liquidity Provision Around S&P 500 Index Additions
In 2011, Green and Jame researched to scrutinise the trades of key capitals and additional organisations accompanying the S&P 500 index add-ons. They found that index capital began re-harmonising their selections with the declaration of configuration deviations and did not completely form their positions up until weeks after the actual day and time (Green & Jame 2011).
Swapping away from the actual date turned out to be more dominant for the frameworks with lesser indicators of liquidity and amid great index capital, which was in line with the index capital longsuffering a sophisticated tracking fault to drop the price effect of the trades. Minor and average-cap assets added liquidity to index capital around add-ons and provided ordinary shares with a bigger percentage of the expected liquidity providers causing inferior enclosure earnings (Green & Jame 2011).
Liquidity Provision and Its Predictability
The earnings of short-range setback tactics in equity markets can be understood as a substitution for the revenues from liquidity provision. This policy is a robust indicator of the fact that the income from liquidity provision is extremely foreseeable. The VIX index may be used to predict the revenues. Projected incomes and provisional Sharpe proportions from liquidity provision (LP) intensify throughout the intervals of economic market disorder (Green & Jame 2011).
The outcomes indicate the extraction of liquidity stock and accompanying growth in the anticipated revenues from liquidity provision, as the key motivator behind the fading of liquidity all through the periods of financial market chaos, along with the concepts of liquidity provision by monetarily limited mediators. There is also an indication of the fact that some shared assets steadily take the role of contrarian brokers, and produce revenues in the stock marketplace by offering liquidity to the stockholders, although others methodically claim liquidity and experience the expenses of proximity (Green & Jame 2011).
Averagely, the joint funds’ expenses of proximity outdo their revenues from offering liquidity. The capitals with leakages, currents that connect to the trade currents, top marketplace beta assets, and the resources extremely exposed to the impetus approach experience the biggest losses regarding proximity. The joint assets’ usual deficit can be explicated with their costs of proximity. To conclude, the deposits’ past spendings on the proximity envisage their alphas. A shared asset’s stock choice expertise can be disintegrated into supplementary units that contain liquidity-captivating exasperated swapping and liquidity provision (Green & Jame 2011).
It was eventually found that historical performance foresees the forthcoming performance better amid resources interchange in the markets impacted more by informational happenings. Former front-runners get a risk-accustomed post-remuneration extra return of 40 base points each month. The majority of that great performance originates from the exasperated interchange (Green & Jame 2011). Exasperated trading is vital for the funds that are focused on growth, and liquidity provision is the key approach for the newer revenue assets.
Private Equity Performance and Liquidity Risk
Private Equity Liquidity Risk
Franzoni, Nowak, and Phalippou stated in their 2012 research that PE has conventionally been believed to deliver variation benefits. Nevertheless, these benefits may be lesser than expected as Franzoni, Nowak, and Phalippou discovered that private equity agonised from a substantial contact with the identical liquidity risk aspect as PE and other different benefit categories (Franzoni, Nowak & Phalippou 2012).
The unqualified liquidity danger upper limit is nearly 5% per annum and, in a four-feature classification, the insertion of this liquidity risk upper limit condensed alpha to nothing. Additionally, they indicated the fact that the connection between PE earnings and general marketplace liquidity arises using a capital liquidity channel (Franzoni, Nowak & Phalippou 2012).
Private Equity Liquidity in the Secondaries Market
The typical revenue on bonds with exceptional sensitivities to collective liquidity surpasses that for bonds with trivial sensitivities by approximately 5% per annum. The constructive correlation between the projected company bond earnings and liquidity is vigorous to the impacts of the defaulting and intermittent betas, liquidity extents, and other crucial features, along with the dissimilar archetypal conditions, test procedures, and an assortment of liquidity trials (Franzoni, Nowak & Phalippou 2012).
Liquidity risk is an imperative factor of predictable business bond revenues. The banks that depend more profoundly on the fundamental credit and equity investment backing, which are steady bases of sponsoring, kept on loaning comparative to other banks. The banks that seized more illiquid resources on their profit and loss accounts, on the contrary, improved the resources liquidity and condensed loaning (Franzoni, Nowak & Phalippou 2012). The liquidity risk appeared on the profit and loss account and forced new credit initiation as amplified takedown request banished the loaning capacity. The exertions to deal with the liquidity crisis ended up in decay in credit stock.
Private equity deposit liquidity is apprehended by the number of tenders, their discrepancy, and a superfluous demand for a supplied interest; all assessed utilising the sale data offered by a big advice-giving organisation (Franzoni, Nowak & Phalippou 2012). Moreover, a private equity supply interest is more liquid if the deposit is bigger, has a takeover-intensive approach, less unstrained assets, has made fewer supplies and is ruled by an executive whose resources were formerly traded in the secondaries marketplace.
Private equity deposits’ liquidity recovers if more non-customary purchasers, as in opposition to the steadfast secondary assets, offer tenders, and the inclusive marketplace environment is positive (Franzoni, Nowak & Phalippou 2012). In conclusion, the liquidity substitutions are meaningfully and certainly related to the ultimate tenders at which the private equity deposit interests are traded, comparative to the typical marketplace offers. The most important private equity deposit features affect their marketability and that liquidity is estimated in the engaging secondaries private equity marketplace propositions (Franzoni, Nowak & Phalippou 2012).
Private Equity vs. S&P 500
In 2014, Harris, Jenkinson, and Kaplan analysed the performance of almost 1500 United States takeover and undertaking investment funds using a novel fact sheet from Burgiss. They discovered an improved takeover deposit performance when compared it to the formerly recognised performance that had constantly topped that of public marketplaces.
Private equities managed to outperform the S&P 500 by 25% when considering a fund’s lifespan and more than 3% per annum (Harris, Jenkinson & Kaplan 2014). Venture assets capital topped public equities at the end of the 20th century but lost its crown with the beginning of the 21st century. Harris, Jenkinson, and Kaplan’s suppositions are built on numerous aspects and risk assessments. Their research also showed that Venture Economics has the lowest signs of performance amid similar businesses.
Performance in Burgiss and Preqin was specified to be on a relatively similar level (Harris, Jenkinson & Kaplan 2014). The major private equity businesses are on the point of continuing to nurture in dimensions and reputation. One of the key motives for this is that autonomous capital reserves in Asia and the Middle East, which stereotypically capitalise in the best interests of a government, are paying attention to the trophy titles in private equity and are reluctant to have confidence in their cash with a minor, not as much of familiar organisations (Harris, Jenkinson & Kaplan 2014).
Effectiveness of Private Equity vs. S&P 500
In their 2012 study, Higson and Stucke presented convincing indications on the effectiveness of private equity, utilising a high-quality fact sheet of deposit cash incomes that covered approximately 88 per cent of the overall assets ever upstretched by the United States takeover resources. For nearly the last four decades, takeover resources had suggestively outdone the S&P 500 (Higson & Stucke 2012). Liquidated capitals from the last two decades of the 20th century have distributed extra revenues of approximately 465 base points in a year.
Higson and Stucke considered accumulating the moderately liquidated reserves up to the middle of the 2000s; this resulted in the fact that the surplus revenues rose to over 800 base points. It was as well found that the cross-sectional discrepancy is substantial with slightly over 62% of all assets doing much better than the S&P. The surplus earnings were proven to be determined by monthly variations instead of trimestrial capital. The researchers also documented an exciting periodicity in revenues with considerably higher numbers for capitals set up at the beginning of each of the previous three periods, and consistently lesser earnings on the way to the end of each period (Higson & Stucke 2012).
Still, they found a noteworthy descending tendency in total revenues over all three decades from the 20th century. Higson and Stucke’s results turned out to be robust to calculating superfluous revenues using money multiples as a replacement for the Internal Rate of Return and were fundamentally unaffected when pricing remaining values at the detected subordinate marketplace markdowns. Limited partners are making an effort to make these standings more beneficial in binary ways (Higson & Stucke 2012).
The primary is by co-participating. This depicts, for instance, that if a private equity business is forming a merger of a public corporation, the limited partners will contribute unswervingly to the deal as an extra stockholder but without their capitals being dependent on the standard private equity firm charges. They would, in force, produce any revenues from the deal without having to cut their share (Higson & Stucke 2012).
The Future of Private Equity
After the time interval of strong development, the private equity trade has gone through a noticeable deterioration. Currently, the future of the undertaking and acquisition businesses appears to be uncertain (Lerner 2010). There are four probable set-ups for the future of PE commerce that were outlined by exploring the determining factors of PE stock and demand. Even though each of the set-ups is backed with the supporting evidence, coming up with an estimate for the future remains problematic (Lerner 2010). The convenience of the private equity marketplace is on the verge of being the topic of discussion for a long time.
Reference List
Fevurly, K 2013, Private Equity Funds, The Handbook of Professionally Managed Assets, pp. 209-228.
Franzoni, F, Nowak, E, & Phalippou, L 2012, ‘Private Equity Performance and Liquidity Risk’, SSRN Electronic Journal, vol. 67, no. 6, pp. 2341-2373.
Green, T, & Jame, R 2011 ‘Strategic Trading by Index Funds and Liquidity Provision Around S&P 500 Index Additions’, SSRN Electronic Journal, vol. 14, no. 4, pp. 605-624.
Harris, R, Jenkinson, T, & Kaplan, S 2014, ‘Private Equity Performance: What Do We Know?’, The Journal of Finance, vol. 69, no. 5, pp. 1851-1882.
Higson, C, & Stucke, R 2012, ‘The Performance of Private Equity’, SSRN Electronic Journal, pp. 1-48.
Jenkinson, T, Sousa, M, & Stucke, R 2013 ‘How Fair Are the Valuations of Private Equity Funds?’, SSRN Electronic Journal, pp. 1-27.
Lerner, J 2010, ‘The Future of Private Equity. European Financial Management’, vol. 17, no. 3, pp. 423-435.
Nowadays, people consider maximizing their investments in long-term, and equity futures are the most effective investment tools that are currently employed in the stock market, as they allow brokers to pay for the current stock price after one year since the actual purchase. Apple Inc. is one of the frontrunners of the technological market that operates under AAPL on NASDAQ platform (Yahoo! Finance, 2017). Its current share price is 158.13, with 0.17% increase (Yahoo! Finance, 2017).
According to the case study, it is assumed that I purchased 100 equity futures of Apple Inc. As a consequence, it could be said that the primary goal of this assignment is to determine whether this investment was rational and evaluate possible potential gain associated with it. It will be assessed with the help of risks of the stocks, its fluctuations, and the financial stability of the price. In the end, conclusions are drawn to summarize the findings of the paper and highlight the ways to increase profits acquired from this offer.
To establish a foundation for discussion, it could be assumed that the price of 100 shares in one year would slightly decrease, and this forecast is based on the dynamics of the prices and general cyclic nature of the stock market.
For example, in 2016, the value of the share experienced a slight downward slope, and despite its rapid growth, a similar situation may incur in 2018. It could be assumed that the price per share will be $150, but this change is insignificant. In turn, this projection is based on the fact that the overall trend is positive and escalating, but it still can be vehemently affected by internal and external forces and various transactions in the stock market.
Figure 1. Five-year projections for AAPL (Yahoo! Finance, 2017).
Another reason for a potential decrease in price for Apple’s share is the intensifying rivalry of the industry. For example, its major competitors, such as Samsung, have well-developed brand images and stable prices per share. Meanwhile, a progressively growing variety of cheaper substitutes has a clear impact on the earnings base and changes the attitude of investors towards the company. This aspect, along with inflation and political and economic fluctuations, may cause severe swings in this market while affecting a share price in a negative way.
Nonetheless, the current price is stable, and these changes may cause only an insignificant decrease in it. Consequently, it may be rational to invest in it, but it will be illogical to consider it as a failure since, in 2018-2019 the price per share is expected to experience growth due to the cyclical nature of the stock market and its rise in the recent future.
In the end, it could be said that the price per share will be lower in 2018 than it is now due to the fluctuations in the stock market and the rising popularity of substitute products. In this instance, to mitigate risks and decrease potential losses, it will be rational to take advantage of the main features of equity futures and invest the expected to be paid financial resources in other projects such as a certificate of deposit.
The price is projected to decrease by 5% at maximum, and it will be rational to invest money ($150,000) in a certificate of deposit with 7% to cover the costs. Nonetheless, not many banks offer it, and usually, the maximum annual rate accounts for 1.7% while investing $159,000 will be logical in this case. Overall, this situation presents the worst-case scenario, and due to a high dependence on the stock price on the internal and external environment, prices may rise.
A Private equity firm can be defined as a company that invest huge amounts of capital known as the private equity fund in the stakes of a private firms. In other words, private equity firms invest in classified equities of working companies through application of various investment strategies. From the definition, private equity means capital that is not traded in the stock exchange markets (Bruining et al. 593).
In most cases, private equity firms raise private equity capital from institutional investors and devote the capital in public firms that face delisting from the stock exchange through buyouts.
Private equity capital is normally used in the expansion of working capital of the acquired firm, make acquisitions, finance research and development as well as new technologies. In addition, the private equity capital can be invested in strengthening the balance sheet of an acquired company.
As indicated, private equity firms are often institutional and recognized investors committed to long-term returns on investments. Since private equity firms invest in companies that are almost collapsing, they often require longer periods for the acquired firms to turn around in order to start earning back investments.
In most cases, private equity firms normally apply venture capital, leveraged buyouts as well as capital growth as the investment tactics (Bruining et al. 595). Leveraged buyouts are the situations where private equity firms invest in a nearly collapsing public firm risking delisting from the stock exchange market. Leveraged buyouts involve purchasing huge debts of the firm with the hope of reselling once financial conditions have improved.
The injected funds are used to improve financial statements as well as prospects of the firm. Essentially, Private equity firms are perceived as the sponsoring companies since they provide funds for investments. In other words, private equity firms support other companies through the provision of financial assistances. In most cases, private equity firms normally raise funds, which they invest in private equities depending on the applied investment strategy.
How and when did private equity firms first started?
Prehistory of private equity firms
Investments in private companies can be traced back to the beginning of industrial revolution when investors were involved in private acquisitions and mergers.Merchant bankers in the financial industry were often involved in making small investments on privately held companies. In addition, financial institutions were acquiring other firms particularly in the mining industry as well as other profitable firms in public sectors (Chemmanur et al. 4039).
Such acquisitions were equated to the current industrial buyouts where private equity firms buy large public corporations that are nearly collapsing. In fact, the buyouts and acquisitions continued throughout the first half of the 20th Century before the development of the current venture capital.
In addition, the first half of the 20th Century was characterized by legal limitations on banks and other financial institutions that constrained the transactions involving private acquisitions (Chemmanur et al. 4039). Moreover, such regulations restricted the flow of capital from the merchant banks to the private firms.
In fact, the private equity firms started to come into existence after the denunciations of financial regulations that put limitations on the flow of capital. Besides, the lifting of the regulations also led to the emergence of venture capital. Venture capital provided funds as well as other factors that contributed to the growth of private equity firms particularly after the Second World War.
The emergence of private equity firms
Private equity firms emerged in 1940s when the development and growth of venture capital and leveraged buyouts were at the peak. In fact, the venture capital and leveraged buyouts were considered part of the private equity firms. Davila, Foster and Gupta argue that the growth and development of venture capital and leveraged buyouts also led to the development of private equity firms 691.
The venture capital provided funds that were greatly required at the time for the development of private equity firms. In addition, leveraged buyouts were part of the capital markets where institutional investors used to participate in the establishments of private equity firms.
Even though venture capital and leveraged buyouts grew and developed in analogous and unrelated paths, they offered suitable market for the establishment of the private equity firms (Bruining et al. 595).
Private equity industry developed particularly in 1946. The established and well-structured venture capital market during the time led to the development of private equity firms. The venture capital provided the much needed funds as well as technical expertise in the management of private equity firms (Bruining et al. 595). The establishment of venture capital brought to an end the shortage of funds that was required for the development of private equity firms.
As indicated, the widespread of equity firms particularly after the Second World War was due to organized private equity market. However, during the period, the equity market was still underdeveloped resulting into the shortage of sources of long-term financing for private equity firms. Due to this inadequacy, the private sector took the opportunity to develop new markets for private equity firms.
The markets offered cheap and long-term sources of capital for existing and newly established firms (Bruining et al. 595). In addition, the new sources of funds established novel grounds for the startup of new equity firms. Essentially, developments of the equity markets that provided long-term and cheap funds resulted in mushrooming of new equity firms.
In addition, the private sector was responding to an economy that had increased funds particularly from the released wealthy military inductees. In fact, there was need for large firms to absorb such capital. In order to come up with such firms, a private sector that would attract large institutions was required. During this time, technical and managerial skills to manage the funds were also inadequate (Chemmanur et al. 4039).
The American Research and Development Corporation (ARDC) was established in 1946 to research on equity firms and their markets as well as to provide adequate advice on ways through which such firms could be developed. In addition, the ARDC was also tasked with the responsibility of raising funds for investments in equities. Moreover, ARDC was to provide training on the private equity management skills needed for the success of private equity firms.
ARDC was majorly formed to boost private equity investments and became the first institution to raise capital and invest in equity. In addition, ARDC took advantage of floating funds from wealthy individuals.
The corporation tapped the floating funds and invested in other areas including mergers and acquisitions that were equally profitable. Besides, ARDC invested in venture capital and was credited as the architecture of the current ventures capital (Chemmanur et al. 4039).
The growth and development of private equity firms from 1946-1980
The growth and development of private equity firms were at a slow progress in the first 36 years since the establishment of private equity firms. In fact, small volumes of private investments, undeveloped private firms’ management as well as unpopularity of private equity firms marked the period (Chemmanur et al. 4039). The smaller volumes in the private equity investments were due to lack of awareness among the institutional investors.
In fact, institutional investors in the early 1960s and 70s were not aware of the presence of private equity firms. Essentially, most of the institutional investors lacked adequate information concerning the operations of private equity firms. In addition, scarce skills and capital required for the success of private equity firms lacked (Chemmanur et al. 4039).
What are the main functions of private equity firms in the economy?
Attracting investment funds
Like most large firms in the economy, private equity firms have greater roles to play in the economy. Private equity activities normally began by successfully attracting investable funds. In other words, the major function of private equity firm is to attract funds that can easily be invested in the economy (Achraya et al. 368).
Offering alternative investment opportunities to the investors
Private equity firms offer alternative investment prospects particularly where some sectors of the economy perform poorly. Moreover, while attracting investable funds, the private equity firms provide ways through which investors can allocate part of their investments in comparatively complicated, long-term investments.
Probably, sectors where investors can apportion their finances for enduring repayment range from pension funds to sovereign wealth funds. In these areas, individual investors are assured of their long-term benefits through appropriate management practices that private equity firms offer.
Investments in small, medium and large enterprises
Private equity firms offer capital to firms of various sizes within the economy. In addition, private equity firms offer funds to all companies in different stages of their life cycle. In fact, firms that are in infant stages can easily get soft loans in private equity firms. Additionally, Small and Medium Enterprises (SMEs) can also seek expansion capital from equity markets.
Most importantly private equity firms normally fund firms that are just about to be liquidated. Besides funding, such firms are also provided with managerial skills as well as other incentives that would enable their continuity. Moreover, family businesses that need succession arrangement also seek assistance from private equity firms (George et al 215).
Private equity firms provide managerial functions
One of the major functions of private equity firms is the provision of managerial expertise. Industries in which private equity firms invest have increased benefits from the function. In fact, firms that are managed by private equity companies normally benefit from improved information arrangement as well as enhanced business control capacities.
In addition, private equity firms have the capability of introducing performance-based incentives aimed at enhancing performance of the invested companies. Further, private equity firms management tends to have increased control of novel management approaches and provides extensive value added post-investment support.
Increased capital investments
The attraction of investments funds into the economy leads to increased investable funds into the economy. The private equity firms have the capability of attracting investable funds, which increase capital that can be used by other businesses from various sectors of the economy. Statistics indicate that private equity firms have attracted over $250 billion for investment capital in the last financial year (George et al 215).
In market-based economy such as US, the private sector is perceived to be the major driver of economic growth. As such, private equity firms play critical roles in attracting and increasing capital for investment in the private sector. Therefore, private equity firms fuel economic intensification through the provision of investment funds. In addition, private equity firms facilitate increased private sector investments thereby inspiring economic growth
New business creation and sustainable investments
The funds invested by the private equity firms result in the creation of new businesses, which in turn lead to the generation of new jobs. In addition, private equity firms invest in businesses that are almost being bankrupt thereby ensuring their long-term sustainability. Such firms are critical for the growth of the economy (Cressy et al. 661).
Besides, sustaining the firms also mean maintaining the existing jobs as well as increasing the prospect of creating novel employment. Essentially, private equity firms promote the creation of new business through the provision of capital and management advice.
In addition, through maintaining the existing firms, private equity firms contribute to the preservation of employment opportunities. Besides sustenance and creation of businesses as well as jobs, private equity firms are also a source of positive externalities.
Positive externalities are benefits enjoyed by the third parties. In fact, increasing the knowledge base particularly in management and entrepreneurship increases multiple benefits that can only be described as positive externalities.
Improved management methods
Private equity firms have the capability of improving the managerial skills of various companies in which they have invested. In fact, the private equity management often has constructive influences on the performance procedures in terms of profitability and growth on firms in which they have invested (Chemmanur et al. 4040). In addition, private equity firms have the capability of ensuring that firms that are collapsing are provided with financial and management impetus in order to enhance their productivity.
Through such measures, private equity firms ensure the survivability of firms across various sectors in the economy. Besides, firms having succession planning challenges often seek assistance from private equity firms. Private equity firms provide appropriate advice on succession arrangement, which ensures long-term sustainability and growth.
Greater innovation
Private equity firms foster innovation through various activity outcomes in the economy. In fact, through the provision of improved managerial skills, firms become innovative and entrepreneurial. One of the ways through which innovation can be enhanced is through investments in research and development. Putting funds on development of new products enhances the innovative culture within the firm.
Private equity firms not only fund research and development on new products and services but also other operation processes undertaken within the firm. Moreover, private equity firms invest in start-up firms that tend to be innovative.
Increased productivity
Private equity firms improve the productivity of businesses through various activities. In fact, there is a direct relationship between increased productivity and economic growth. Increased productivity results from efficient production as well as use of resources (Bruining et al. 601). Essentially, private equity firms promote measures that aid in the efficient production and use of resources.
The private equity firms provide improved management as well as advice on better resources utilization. One of the ways in which firms can improve their efficiency is through appropriate training on management. Acquiring better management skills particularly in efficient use of resources is one of the ways through which organizations improve their productivity, which translate into general economic growth.
In addition, capital accumulation is encouraged through investments made on the fixed assets such as factories, housing units and production equipments. Private equity firms have large pools of capital that can be invested in such fixed assets. Such investments in fixed capital increase labor productivity.
The provision of capital for investments in physical capital contributes hugely to the economic growth. Further, by supporting the formation of new businesses, increased employment opportunities are created. Substantial growth in the economy can only be realized when firms are capable of sustaining the creation of new employment opportunities.
Enhanced competitiveness
Firms with enhanced productivity have increased chances of being competitive at all levels in the market. The reason is that profits earned can be re-invested in other areas that provide the firm with increased competitive advantage. Besides, increased productivity contributes to economic competitiveness when it results in the amplification of firms’ competitiveness both at the local and global markets.
Increased economic competitiveness ensures enlarged economic expansion. Essentially, private equity firms contribute to increased economic competitiveness through enhanced productivity. Besides, increased economic growth is directly associated with trade exports.
Private equity firms encourage economic growth in a number of ways. First, private equity firms support export-oriented companies. Additionally, private equity firms augment the capability of export-oriented companies to develop into worldwide markets.
How do private equity firms operate and make profit?
Private equity firms invest in classified equities of working firms through the application of various investment strategies. Actually, investment approaches of private equity firms encompass venture capital, leveraged buyouts and capital growth. Private equity firms are perceived as sponsoring companies since they provide funds for investments.
In other words, private equity firms support other companies through the provision of financial assistances. In most cases, private equity firms normally raise funds, which they invest in private equities depending on the applied investment strategy.
Essentially, private equity firms normally raise investment funds commonly referred to as the private equity capital from various financial institutions particularly pension funds and insurance companies to finance and sponsor investments.
A fee is charged on every investment made. The fees charged together with prearranged share of profit are the earnings of private equity firms on the investments made. In other words, private equity firms get carried interests on every private equity fund put in investments.
In most cases, private equity firms get hold of considerable minority position in some of the firms they have invested. Once the sizeable marginal position has been accomplished, private equity firms optimize the expected outcome of the invested capital. Initial Public Offerings (IPOs) are significant methods through which investment returns are conveyed back to the owner.
Besides, private equity firms get returns on their investments when the firms they manage are sold through mergers and acquisitions. Recapitalizations are also applied in order to realize the gains though at minimal occasions.
In the initial public offerings, shares of the firm are offered to be bought by the public through the capital markets particularly at various stock exchanges. The public offering provides fractional and instantaneous realization of returns to the private equity firm, which is normally the sponsor. In addition, IPOs offer the private equity firms with markets in which they will later sell its shares.
Through mergers and acquisitions, the firms being managed are sold out or merged with performing firms. Private equity firms realize the returns from sales proceeds. In the case of a merger, private equity firms have shares of profits made by the new firms that result from the mergers.
One major characteristic of private equity firms is that they make long-term investments in less liquid assets and have direct influence on the operations of firms. In addition, private equity firms take charge of the firms’ operations in order to supervise any potential risks and accomplish the required development through long-term investments.
What are some of the advantages of private equity firms in terms of disclosure and accounting regulations over other publicly-traded firms?
Private equity firms operate like private companies. Therefore, private equity firms gain from the accruing benefits because of less restricted financial reporting and legal requirement. In other words, private equity firms are not exposed to stringent financial reporting and legal regulations.
The less reporting requirement procedures have increased benefit to private equity firms. The benefits range from increased control of the decisions made to elimination of double taxation on their shareholders.
Greater control of the firm’s decisions
With reduced reporting requirements and substantially decreased pressures from shareholders and markets, private equity firms have increased flexibility in terms of operations.
As such, private equity firms focus attention towards achieving long-term growth instead of quarterly earnings that are part of the financial reporting requirements in other publicly traded firms. In addition, due to reduced shareholders expectations and approvals, private equity firms have the capability of making decisions and taking action without the approval of the shareholders.
Increased benefits from Securities and Exchange Commission (SEC) exemptions
The private equity firms are exempted from some of the Securities and Exchange Commission (SEC) filling requirements as well as other post-offering duties. In fact, private equity firms are exempted from some of the federal financial security regulations and obligations such as reporting on the shareholders’ discussions, investors’ conferences as well as research analysts’ discussions.
Such regulations have been found to be costly, consuming much of the firms’ time and have negative effects on productivity. In fact, most public firms argue that the effects of SEC regulations on the productivity of the firms are unpredictable.
The stringent disclosure requirements of SEC such as filling annual and quarterly reports are generally additional accounting and legal expenses. Therefore, exemptions from SEC regulations have drastically reduced accounting and legal costs for the private equity firms.
Private equity firms reduces the cost of going public
Private equity firms normally reduce various regulatory costs associated with going public. In fact, private firms going public usually go through a range of processes including restructuring as well as implementation of new accounting regulations and procedures. The restructuring process is designed to avoid possible issues that may come about due to SEC filing requirements.
The restructuring process normally involves reforming the structure of the organization and capital, bookkeeping procedures and practices, material convention, equity participation policies as well as the employment conformities.
In addition, detailed disclosure documents must also be prepared for the new investors. All the requirements are costly in terms of finance and time. Private equity firms sponsoring public offerings are normally exempted from the detailed SEC requirements thereby reducing the costs of going public.
Reduced chances of disclosing sensitive information
Private equity firms are not required to disclose details of their operations. As such, the chances of revealing sensitive information that can be used by the competitors are reduced. In fact, non-disclosure of the operations and financial outlook of private equity firms are added competitive advantage over other publicly traded firms. Competitors can use the information to point on the weaknesses, which can be used to reduce the firms’ reputations as well as erode the clients and shareholders confidence particularly during the financial turmoil.
Free from shareholders activism
In most cases, regulations require that the financial institutions as well as hedge funds buy over 50% stake in any public firm. Buying over 50% stake mean that the financial institutions can gain control over the operations of the business. As such, the majority shareholder can influence the sales as well as any considerable restructuring.
In fact, public firms that have been taken over by these financial institutions and hedge funds risk losing their entire stake. Since the requirement does not apply to private equity firm, they normally gain minority stake on firms they have invested.
In fact, the firms do not risk losing their stakes to the private equity firms. However, private equity firms gain executive control in order to manage potential risks and realize long-term growth and development of the firm.
Is private equity firm the same as the private equity fund?
Private equity firms and private equity funds are normally being confused to mean the same thing. In fact, private equity firm and private equity fund have been used interchangeably in most of the scholarly articles. However, the two terms are different.
Essentially, private equity firms are companies that make long-term investments on both private and public corporations through the application of various strategies (Cressy et al. 649). Researches indicate that private equity firms commonly apply investment approaches that range from venture capital to capital accumulation.
On the other hand, private equity funds are finances that private equity firms invest on other companies. Besides, private equity funds are a pool of capital that private equity firms collect from institutional and retail investors in order to put in long-term investments through the application of various investments approaches.
The private equity funds earn profits or interests for the private equity firms. In other words, private equity firms earn a carried interest on every private equity fund that is put in investments (Cressy et al. 649).
What are some of the well-known private equity firms and where are they located
Consistent with most current rankings of private equity firms, the most popular and largest equity firms range from the Carlyle group to Bain Capital. The leading firms often make large purchases in form of buyouts. In other words, well known private equity firms invest directly on the companies instead of trading in private equity asset category.
According to the current categorization, the well-known private equity firms include the Carlyle group, which is situated in Washington DC, Kohlberg Kravis Roberts based in New York as well as Goldman Sachs Principal Investments Group that is also based in New York.
Also in the top position in terms of trading volumes include Blackstone Group headquartered in New York, TPJ Capital, which is based on both Texas and California and Bain Capital based in Boston, Massachusetts.
Works Cited
Achraya, Viral, Olivier Gottschalg, Moritz Hahn and Conor Kehoe. “Corporate Governance and Value Creation: Evidence from Private Equity.” Review of Financial Studies, 26.2 (2013), 368–402. Print.
Bruining, Hans, Ernst Verwaal and Mike Wright. “Private equity and entrepreneurial management in management buy-outs.” Small Business Economics, 40.3 (2013), 591–605. Print.
Chemmanur, Thomas, Karthik Krishnan and Debarshi Nandy. “How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface.” Review of Financial Studies, 24.12 (2011), 4037–4090. Print.
Cressy, Robert, Federico Munari and Alessandro Malipiero. “Playing to their strengths? Evidence that specialization in the private equity industry confers competitive advantage.” Journal of Corporate Finance, 13.4 (2007), 647–669. Print.
Davila, Antonio, George Foster and Mahendra Gupta. “Venture capital financing and the growth of startup firms.” Journal of Business Venturing, 18.6 (2003), 689–708. Print.
George, Gerard, Jonathan Wiklund and Shaker Zahra. “Ownership and the Internationalization of Small Firms.” Journal of Management, 31.2 (2005), 210–233. Print.
When one intends to start a business, one should focus on how to raise capital and raise money to finance the business operations. Today, many commercial lenders charge differential interest rates for the money borrowed. Some local and international companies specialize in investing in businesses. Such companies have some set rules that allow it to run its plans and enhance mutual understanding. Other logistics like the human power and the business operations should be studied before the parties engage in business. Other factors that should be considered before deciding on debt financing or equity borrowing is the tax situation in the country of interest, the business plan and potential investors (Sawyer and Sprinkle, 2009).
Discussion
The equity financing is fundamental in ensuring that a person interested in starting a business does not have burden of huge loans on him/her. The business start-up loan depends on the nature of business, the location of the business, the size of the business and the price of goods in the market. A person who intends on starting a business should always do a budget of all his business plans to ensure that he/she has a working figure that can allow effective planning (Sawyer and Sprinkle, 2009). On the other hand, loan repayment can be difficult because of high interest and increased cost of life; thus, equity investing allows a businessperson be free of settling loans that have high interest loans (Kenen, 1964, p.51).
Additionally, equity financing allows the two parties to engage in a business that is well-defined by the set rules. For example, when a businessperson drafts a prospectus that discusses issues like losses and profit, the investor can understand when the business plunges in losses. This is from the fact that business investors understand from the start that a business either can blossom or fail. It is always obvious that commercial lenders and some relatives would expect to be repaid back their loan whether the business does well of fails. Thus, borrowing from commercial lenders such as banks can be riskier compared to selling some shares to an investor. It is essential to state that commercial lenders always ask for security like personal properties like title deeds, vehicles and other assets. It is evident that when a debt-financed business fails, the businessperson will loose his/her properties.
Borrowing in the form of equity also allows the businessperson to choose whom he/she is interested in working with and financing the business. The businessperson can visit many investors and choose the investor he/she is comfortable to work with. It is fundamental that the businessperson chooses the investor wisely as this will define the business operations. Some investors have stringent terms that can strain the businessperson; hence, equity financing allows the businessperson choose his/her team player wisely. In most cases, borrowing in form of debt does not offer the businessperson with many options. According to Sawyer and Sprinkle, the commercial lenders are some lobby groups that have special interest; hence, they benefit themselves. They do not necessarily have the interest of the business; rather, they focus on what they can benefit from the trade partnership (Sawyer and Sprinkle, 2009).
In addition, equity financing is always guided by governmental and international policies that guide the two partners. These policies determine how businesses operate, the tariffs, the trade barriers and other factors that relate to trade. The economic sanctions guide in ensuring that trade partner follows the set rules to the latter. These sanctions are laid down by the two partners and agreed upon so that any deviance can be punished accordingly. This ensures full participation and commitment by the equity investor; thus, promoting the smooth running of trade between them. Additionally, equity financing is advantageous because the government policies ensure that certain issues pertaining the business or trade are sorted. For example, in case there is market failure, which affects the trade performance, the governments through its arms of economic regulations can intervene. This ensures that partners do not plunge in losses that can lead to trade reduction or business failures. On the other hand, the government policy applies to debt financing to some small extent. In essence, the lender determines most of the terms and conditions that guide the trade or business.
Another factor that can help determine the disadvantage of debt financing is the level of bankruptcy. There exists a close relationship between the level of bankruptcy and the level of debt-financing. The higher the amount of loan borrowed from a commercial lender or a family lender, the higher the chances of bankruptcy (Sawyer and Sprinkle, 2009). The equity financing is more advantageous because it allows the governments to assist in cases of bankruptcy. Indeed, some governments through the World Trade organizations and other arms have remarkably participated in establishing, expanding, and rebuilding trade ties between countries that had fallen (Sawyer and Sprinkle, 2009).
Furthermore, debt financing is more risky than equity borrowing because it does not allow the growth of business at a faster rate. This is because the profit from the trade is used in settling the loans that sometimes have high interested rate because of high foreign exchange rate in the market. The graze period that many commercial lenders like the International Monetary Fund (IMF) could be shorter; thus, repaying the loan becomes hard. On the other hand, the equity-financed business has greater chance of expanding because the profit is used in opening constituent centers around the world and improving human capital (Sawyer and Sprinkle, 2009).
Despite the disadvantages, that debt financing has as discussed above, borrowing to finance once business can also be advantageous. First, it allows one to have a full control of one’s business. This allows the business operator to determine the fate of his/her business. He/she is able to make all the decisions that pertains the business like the human resource, profit utility, business expansion and other issues that concern the running of the business. Additionally, debt financing is advantageous because the businessperson does not share the profits with any investor.
Conclusion
Conclusively, the debt financing can be indeed riskier than borrowing in the form of equity. This is because debt financing is limited fulfilling the interests of the commercial lenders, rather than promoting the welfare of the entire partnership. In the 19th chapter of the “international economics” by Sawyer and Sprinkle, they introduce the foreign exchange to address the issue of huge debts. However, the fact remains that borrowing to finance a business is riskier because one also has to have some form of collateral to act as the security measures.
Reference list
Kenen, P. (1964). International Economics. New York: Prentice Hall Publishers.
Sprinkle, R., and Sawyer, W. (2009). International economics. New York: Prentice Hall Publishers.
The end of the 20th century was characterized by the rapid development of the private equity market. Numerous funds were created by private equity firms to privatize giant corporations and improve profits (Demaria 10). The rise of this tendency can be associated with the appearance of potent actors who concentrated significant sums of money in their hands and looked for an opportunity to invest them to generate revenue (Burmester 34). However, this very motif preconditioned the ambiguous nature of the phenomena of private equity and gave rise to numerous debates about its impact on the development of the economy.
There are diverse definitions of the given notion. Thus, private equity can be determined as specific not publicly traded investment funds organized by large institutional investors, university endowments, and wealthy individuals (Demaria 11). In other words, this sort of capital comes from accredited investors who can offer significant sums of money for extended periods hoping to derive benefit from this sort of deal (Burmester 23).
The majority of private equity firms engage in so-called leveraged buyouts when substantial sums are utilized with the primary aim to finance large purchases and own particular companies (Gadiesh and Hugh 65). Having conducted these transactions, private equity firms try to improve their states and revenues using a newly bought organization.
Another fact is that money invested in companies regarding private equity is not presented on the stock exchange. The given fact triggers numerous debates about the issue as it can also be associated with the lack of transparency and control. For instance, in 2015, claims to assess the functioning of the private equity industry emerged (Zeisberger et al. 56). To a greater degree, these were preconditioned by the high level of incomes and unprecedentedly giant salaries earned by employees working in the sphere (Burmester 45). At the same time, the use of money and assets that are not traded on a stock exchange complicates the monitoring of these firms functioning and results in their increased power to interfere with the work of other companies.
Moreover, private equity firms demand a majority stake to ensure that their funds will be secured. In such a way, even getting much more money, companies might experience losses because of the lack of ownership and control over their finances (Kelly 70).
Participation of private actors means a significant loss of control as they set new strategies and approaches to team management (Kelly 78). Under these conditions, organizations become deprived of an opportunity to impact their development and become observers. The case of Simmons Mattress evidences the given problem. Having experienced a buyout, the company lost its ability to control the situation and turned into a source of cash for the private equity firm (Creswell).
Altogether, private equity is one of the topical aspects of the modern business world. However, it should be considered a dangerous practice that lacks transparency. Moreover, it deprives other companies of an opportunity to control their functioning and finances which has a pernicious impact on their rise.
Works Cited
Burmester, Daniel. Private Equity: How the Business of Private Equity Funds Works. CreateSpace Independent Publishing Platform, 2018.
We should expect share flotation costs to be well below the company’s equity. In general, flotation costs may vary depending on the company’s size and what actions will be taken before issuing shares to the public. Flotation costs include legal, underwriting, arranger’s, publishing, and auditing fees. These costs reflect the possible future value of equity after increasing income from shares offered to the public. Logically, these costs cannot exceed (especially exceed significantly) the cost of equity. These costs must be carefully considered so that the company does not suffer losses caused by short-sighted resource management and overestimated opportunities. Unjustified spending on shares before their launch and presentation will reduce the company’s equity (Cornett et al., 2021). Public sentiments and crises of the present and the near future should be considered when creating a table of flotation costs.
Managers should remember that flotation costs are a one-time investment that will not permanently increase the equity cost (or at least several times). If a company issues shares, it pays flotation costs necessarily. Otherwise, the company is looking for other ways to increase the value of equity capital and attract new investments. Every time the company issues new shares, it will be necessary to pay a new flotation cost no matter how often (Cornett et al., 2021). However, such expenses are not spontaneous, as a rule, and can significantly damage the company’s capital. It is advisable for directors and analysts to foresee a possible issue of shares and to pre-set flotation costs. Most likely, they should also carefully clarify how specialists will carry out the audit, how exactly the publishing services will help with the issuance of shares, and whose services these will be.
Reference
Cornett, M. M., Adair, T., & Nofsinger, J. (2021). M: Finance (3rd ed.). New York, NY: McGraw Hill/ Irwin.
