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Private equity and asset

allocation

Submitted by:

Mitakshara Sharma

Keertika Bhatt

Rahul Kumar

Dheeraj Sharma

Deepica Garg

Sursh Kumar Swami

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PrivatePrivate equity,equity, inin finance,finance, isis anan assetasset classclass

consistingconsisting ofof equityequity securitiessecurities inin operatingoperating

companiescompanies thatthat areare notnot publiclypublicly tradedtraded onon

aa stockstock exchangeexchange..

Private equity

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Investment Generally made by:Investment Generally made by:Private Equity FirmPrivate Equity FirmVenture CapitalVenture CapitalAngel InvestorAngel Investor

Providing Working Capital To A TargetProviding Working Capital To A TargetCompany To:Company To:

nurture expansionnurture expansionnew product developmentnew product developmentrestructuring of the companys operations,restructuring of the companys operations,management, or ownership.management, or ownership.

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Leveraged BuyoutsLeveraged Buyouts

Venture CapitalVenture Capital

Growth CapitalGrowth Capital

Distressed InvestmentsDistressed Investments

Mezzanine CapitalMezzanine Capital

Common investmentCommon investment

strategiesstrategies

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AA strategystrategy ofof investmentsinvestments wherewhere aa companycompany isis acquiredacquired fromfromthethe currentcurrent shareholdersshareholders withwith thethe useuse ofof financialfinancial leverageleverage..

FinancialFinancial sponsorsponsor doesn'tdoesn't commitcommit wholewhole capitalcapital..

SponsorSponsor willwill raiseraise nonnon--recourserecourse acquisitionacquisition debtdebt..

TheThe sponsorsponsor isis benefittedbenefitted inin twotwo waysways::

Leveraged buyoutsLeveraged buyouts

(1) the investor itself only needs to provide a(1) the investor itself only needs to provide a

fraction of the capitalfraction of the capital for the acquisitionfor the acquisition

(2) the returns to the investor will be enhanced(2) the returns to the investor will be enhanced

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TheThe amountamount ofof debtdebt usedused toto financefinance aa transactiontransactionvariesvaries accordingaccording toto::

(1)(1)thethe financialfinancial conditioncondition andand historyhistory ofof thethe

acquisitionacquisition targettarget

(2)(2) marketmarket conditionsconditions

(3)(3)thethe willingnesswillingness ofof lenderslenders toto extendextend

creditcredit (both(both toto thethe

LBO'sLBO's financialfinancial sponsorssponsors andand thethe companycompany toto

bebe acquired)acquired)

(1)(1)thethe abilityability ofof thethe companycompany toto covercover thosethose

costscosts..

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InvestmentsInvestments mademade inin lessless maturemature companies,companies, forfor thethe launch,launch,

earlyearly development,development, oror expansionexpansion ofof aa businessbusiness..

IfIf nono sufficientsufficient fundsfunds toto financefinance projects,projects, thenthen mustmust seekseek

outsideoutside financingfinancing..

VentureVenture capitalistscapitalists getget significantsignificant controlcontrol overover companycompany

decisions,decisions, andand aa significantsignificant portionportion ofof thethe company'scompany'sownershipownership..

VentureVenture capitalistscapitalists areare expectedexpected toto nurturenurture thethe companiescompanies inin

whichwhich theythey investinvest..

Venture capitalVenture capital

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ThereThere areare typicallytypically sixsix stagesstages of of ventureventure

roundround financingfinancing::(1)(1)SeedSeed MoneyMoney:: LowLow levellevel financingfinancing neededneeded toto

proveprove aa newnew idea,idea, oftenoften providedprovided byby angelangel

investorsinvestors.. CrowdCrowd fundingfunding isis alsoalso emergingemerging asas ananoptionoption forfor seedseed fundingfunding..

(2)(2)StartStart--upup:: EarlyEarly stagestage firmsfirms thatthat needneed fundingfunding

forfor expensesexpenses associatedassociated withwith marketingmarketing andandproductproduct developmentdevelopment..

(3)(3)FirstFirst--RoundRound :: EarlyEarly salessales andand manufacturingmanufacturing

fundsfunds..

--

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AnAn investmentinvestment (generally(generally minorityminority

investment)investment) inin relativelyrelatively maturemature

companiescompanies thatthat areare lookinglooking forfor

capitalcapital toto expandexpand oror restructurerestructureoperations,operations, enterenter newnew marketsmarkets oror

financefinance aa significantsignificant acquisitionacquisition

withoutwithout aa changechange ofof controlcontrol ofof thethe

businessbusiness..

Growth capital

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InvestmentsInvestments inin financiallyfinancially

stressedstressed companiescompanies..

TwoTwo broadbroad subsub--strategiesstrategies::

((11)) "Distressed"Distressed--toto--Control"Control" oror

"Loan"Loan--toto--Own"Own" strategiesstrategies --investorinvestor providesprovides seniorsenior debtdebt securitiessecurities..

--cancan influenceinfluence restructuringrestructuring..

-- cancan participateparticipate inin anan auctionauction ofof thethe companyscompanys

assetsassets

22 "S ecial"S ecial Situations"Situations" oror

Distressed and Special SituationsDistressed and Special Situations

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Refers toRefers to subordinatedsubordinateddebtdebt oror preferred equitypreferred equity securities.securities.

Often used by smaller companies.Often used by smaller companies.

Allows such companies to borrowAllows such companies to borrowadditional capital beyond the levelsadditional capital beyond the levels

that traditional lenders are willingthat traditional lenders are willing

to provide.to provide.

Mezzanine capitalMezzanine capital

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Real estateReal estate

InfrastructureInfrastructure

Energy and PowerEnergy and Power

Merchant BankingMerchant Banking

Fund of FundsFund of Funds

Other strategiesOther strategies

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Asset Allocation

Asset allocation is an investment strategy thatattempts to balance risk versus return by adjusting thepercentage of each asset in an investment portfolio

according to the investors risk tolerance, goals andinvestment time frame.

Asset allocation is based on the principle that differentassets perform differently in different market and

economic conditions.

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WHY ASSET ALLOCATION

IS REQUIRED?

Different asset classes offer returns thatare not perfectly correlated, hence

diversification reduces the overall risk interms of the variability of returns for agiven level of expected return.

To generate adequate returns to meet thefinancial goals at desired level of risk.

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ASSET CLASSES

The process of allocating money between equity stocksand fixed income securities such as bonds and fixeddeposits is called asset classes.

Division::

Equities

Bonds

Mutual funds

Real estates

Commodities(gold/silver)

Antiques/arts

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Asset Allocation

Strategies

Strategic asset allocation

Tactical asset allocation

Drifting asset allocation

Balanced asset allocation

Dynamic(insured) asset allocation

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STRATEGIC ASSET

ALLOCATION

The primary goal of a strategic assetallocation is to create an asset mix that

will provide the optimal balance betweenexpected risk and return for a long-terminvestment horizon.

2 APPROACHES UNDER THIS::INFORMAL APPROACH

FORMAL APPROACH

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Tactical asset allocation

Used to develop short-term strategies to exploit changes in marketconditions

method in which an investor takes a more active approach that

tries to position a portfolio into those assets, sectors, or individualstocks that show the most potential for gains.

Enhancement in the performance of the portfolio through anopportunistic shift in the asset mix in response to changing patternsof reward in the capital market.

Value oriented approach-as it considers earnings yeid and yeild tomaturity

Contrarian in nature as it involves buying on market decline andselling on market rise.

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DRIFTING ASSET

ALLOCATION

BUY AND HOLD policy.

Irrespective of what happens to relative

values, no rebalancing is done.

Initial portfolio be left undisturbed.

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BALANCED ASSET

ALLOCATION

Periodical rebalancing of the portfolio to ensure that thestock bond mix is in line with the long term normal mix.

This policy calls for maintaining an exposure to stocksthat is constant proportion of portfolio value.

if the desired constant mix of stocks and bond is say50:50 , this policy calls for rebalancing the portfoliowhen relative values of its components change,so that

the target positiones are maintained. Unlike the buy and hold policy its do something

policy.

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Insured asset allocation

Used to develop short-term strategies to exploit changes ininvestors objectives and constraints

This is a portfolio insurance strategy.

Involves shifting the asset mix mechanistically in response tochanging market conditions.

For ex:: the fund manager may follow a constant proportion portfolioinsurance (CPPI) policy

CPPI POLICY::INVESTMENT IN STOCKS=m(portfolio value floor)

Where m is greater then 1

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Which Allocation Strategy is Best?

Define $ invested in stocks (S)

S= m(A - F)

where A=

total asset value F = floor value for assets

m = multiplier

B = $ invested in riskless bonds (=A-S)

Three Strategies (A=100):

Buy and Hold (m=1, F=40)

Constant Mix (m=.6, F=0)

Portfolio Insurance (m=2, F=70)