Our research covers three principal areas of the U.S. private markets, along with selected private market opportunities. For each, we set out how value is created, what we examine and what can go wrong.
Private equity is the ownership of operating businesses outside the public markets. Its main forms include buyouts, in which a sponsor acquires a controlling stake, often with borrowed money; growth equity, which provides capital to expanding companies, usually as a minority investor; and buy-and-build strategies that consolidate fragmented industries through a series of acquisitions. Co-investments allow investors to participate directly in a specific transaction alongside a lead sponsor, typically with greater transparency into the individual deal.
Value in private equity generally comes from three sources: growth in earnings driven by revenue expansion and operational improvement; reduction of debt from the business's own cash flow; and any change in the valuation multiple between entry and exit. The most durable value usually comes from the first two. Reliance on a higher exit multiple is a source of risk rather than a plan.
Many growth-stage U.S. companies raise substantial capital privately before considering a public listing. Their shares may be acquired through primary funding rounds or through secondary transactions, in which existing shareholders such as early employees or investors sell their holdings. Access is often indirect, through special-purpose vehicles or funds that hold the shares.
The opportunity lies in participating in a company's growth before it is reflected in public market prices. The challenge is that information is limited, prices are negotiated rather than discovered on an exchange, and the rights attached to different classes of shares can differ significantly. A strong company bought at too high a price, or through an unfavourable structure, can still produce a poor investment.
Hedge funds are privately offered pooled investment vehicles that use a wide range of strategies, including long/short equity, event-driven, global macro, relative value and credit. They are generally available only to investors who meet specified financial or sophistication criteria, and they are subject to less regulatory protection than retail funds.
The aim of most alternative strategies is to generate returns from sources that differ from simply holding the market, such as security selection, corporate events, pricing anomalies or macroeconomic views, and in some cases to reduce correlation with traditional portfolios. Because results depend heavily on the individual manager, manager selection and ongoing monitoring are central.
From time to time our research may also cover other areas of the U.S. private markets that fit our analytical framework. Each is assessed with the same discipline: sources of value, valuation, structure, liquidity and risk.
