Showing posts with label financial instruments. Show all posts
Showing posts with label financial instruments. Show all posts

Wednesday, July 13, 2011

The Private Equity Market Growth

This dynamic cache, however, concerns related to the evolution of the activity. One of the first consequences of market development of private equity buyout is the generalization of so-called secondary, tertiary and even quaternary view, consisting of leveraged acquisitions of companies already owned by one or more other funds. In 2006, the third type of LBO acquisitions was made through this resale between funds. This type of assembly raises serious concerns particularly related to the high level of debt in these successive operations, which raised fears of a bubble bursting. Indeed, the succession of holding recovery strengthens the total weight of debt in financing the acquisition. But a classic LBO average 70% funded by debt. We can now understand the anxieties expressed about the level of debt when several successive LBOs are made on the same entity.

On the other hand, in a context of rising interest rates, the sector should experience difficulties, but still far from an economic downturn. Indeed, this market should continue to grow in the coming years, particularly in France where many companies are to sell, LBO funds have gained credibility recognized, will no doubt key players in the market.

Finally, the IPO of a country, who is stated objective to identify a permanent source of capital and diversify the sources of fundraising, shows that the mutation is now facing the sector. The number of mega deals (i.e. acquisitions exceeding the one billion Euros) is more important, the private equity funds have no choice but to raise more funds. This requires, of course, on the one hand by increasing the resources collected from traditional capital providers. But also, for the sake of being less dependent on suppliers of capital and at the same time less sensitive to changes (particularly increased) interest rates on financial markets, the alternative "fund raising" on the stock market seems obvious. The money, usually so discrete and whose activity is based on the original financing of non hand, may now be found in the coast!

The Private Equity Market

Private Equity market has been experiencing four to five years an unprecedented dynamism. The figures for 2006 speak for themselves:

* 71% growth in business volume in 2006
* 71 billion of funds raised in 2006 or 22% over 2005
* 208 LBOs carried out in France in 2006, with two thirds of companies less than 100M € turnover,
* 1.5 million people now work for a company in France came under LBO, 9 to 10% of private sector employees,

The trend of 2007 is equally positive, as evidenced by recent events in the industry.

Private equity is one of the five main areas of activity of the market says private equity (intervention in the capital of unlisted companies generally to achieve horizon 3-10 years of strong capital gains), other activities are:

* Seed capital (or seed money) which represents the first stage since it is for investment projects still in its infancy, funded in order to develop a technology still in R & D to enable to go forward to a potential market,
* Venture Capital, also known as the Venture Capital (VC), which translates into a capital in innovative companies, being in the early stages of development and which have a high growth potential but also a very high risk,
* Capital reversal of investing in troubled companies to put in place a recovery plan.

The Private Equity, also known financing LBO (Leverage Buy-Out) groups for its funding and leveraged acquisitions of target companies, usually mature companies with strong growth potential. LBO funds - often associated with managers of the target - develop installation and operation of acquisition of the company with the objective to remain the capital of the latter ideally between 5 and 10 years while significantly improving the result of the business recovery. The solutions for output or funds are then variables: initial public offering; taken over by another fund, an industrial sale...

The Private Equity Market Governance

The event was followed by a steady evolution for twenty years, but no relation to the recent explosion. This momentum is the result of a combination of several positive key factors. The first of these is an abundance of liquidity in financial markets. Attracted by high yields (15-16% on average), liquidity providers (banks and insurance institutions, pension funds and private wealth) do not hesitate to fill the capital market allows investors to raise funds more increasingly important. Direct consequence, the number of LBOs has increased but more importantly, the number of very large transactions (over one billion Euros) also increased from 23 in 2006 in France. SMEs are no longer the only target of LBO financing transactions, large groups with a strong interest in the funds management, particularly in terms of activity. So after the frenzy of acquisitions recorded in recent years, these groups now intends to liquidate their related activities generate higher margins.

Then, the low cost of debt, due to low interest rates, gives montages leveraged a significant advantage over other types of acquisition financing transactions. They are based mainly on debt financing of target companies, the current environment when they are particularly favorable to more easily identify a margin between the cost of debt and the return on assets under management. However, this cannot alone suffice to explain the strong growth in activity. Private equity has above all recognition in the governance model in place in companies come under LBO financing. These companies are generally better managed and better valued, and even if some failures can be reported (ten more than 200 annual operations in France), we must recognize that the default rate of the sector is quite low and few are examples of clashes in the area of corporate governance.

Governance is indeed one of the key parameters of a company came under LBO financing. To repay debt must quickly generate cash flow. However, it is recognized that improving the economic value of a target company depends, in large part by the optimization model that will be applied. Therefore, LBO funds agree, from acquisition, to establish a mode of corporate governance more efficient and take the form of a greater focus, accountability of management (generally a shareholder as a result of the operation) and optimization of financial assets.

Saturday, October 23, 2010

Are ULIPs Good Investments?

The unit linked Insurance plans are simply called ULIP. ULIP are financial instruments which will give a term insurance coverage and, investment in stocks  In ULIP, the premium paid by investor goes to two separate investments. One goes for your insurance and the other goes for the investment in stock market. The insurance part consumes less amount and the investment plan consumes more amount. But, in the first year, a major portion of the premium goes to insurance companies as administrative costs which includes the commission paid to the Agents.
So, in the first year, a major chunk of the premium goes to the company and a small amount of the premium is invested in stocks and a small portion is taken for the term insurance. From second year onwards, the administrative costs will be reduced substantially and the balance will be used for investment in stocks and also for the insurance.
If the premium is paid for a long period, at the end of the maturity, one will get a good return. Will this investment option get benefit to the investors? Stock market investments are destined to give good results in the long term, say, more than 10 years.
But people attracted to these plans only during bull market. Their investments get eroded in the next bear market. Now they get confused whether to hold or get rid of it or to invest more. As I said earlier, stock market are bullish in the long term, always, and it will give good results in the longer run. So if an Investor continues his investments even in bear market surely investment in ULIPs will be beneficial.