Financial Intermediaries Exist Purely Because of Information Asymmetries and Agency Conflicts

On a weighted basis, private equity firms were invested in sectors that appreciated 4.5% in 3Q compared to 4.3% by S&P 500. Private equity firms are broadly overweight energy, consumer, and healthcare sectors, while underweight financials and communications sectors compared to the S&P 500. Strong energy returns this quarter have led to

1. What is private-equity investing? Who participates in it and why? How is Palamon positioned in the industry?

More recently, the overall weight of private equity in the Investment Office portfolio has been decreasing (from a target of 25% against the most recent number of 17%) as a consequence of Yale perceiving lack of specialization of several equity funds ("positioning themselves as asset managers") and because of the indiscipline and inexperience of several new market players. Albeit, Yale has not dismissed this asset class due to the historical success, the strong relationships developed with key managers, its know-how and experience on the private equity process and not to be perceived as a market-timer type of investor.

Capital can come from state and corporate pension funds, public and private endowments and personal investors

Finance. In order to finance our startup year, we issued stocks and borrowed loan to finance our operation and for safety in case the sales did not go well. Financing using stocks means that we are selling common or preferred stocks to individuals. In return for the money, they get some ownership over the company and its interest. This helps to bring public’s awareness about the company. If the sales suffice, we will pay the debt in the second round.

With the 2016 presidential race picking up, one of the main issues that are being deliberated among candidates and politicians is the private equity industry and it’s and widespread abuse of a tax loopholes. During the Obama administration, there had already been talks regarding the taxing of “carried interest”, the 20% incentive fee charged by private equity firms, as regular income rather than capital gains. In spite of the failed effort, politicians from both parties are now aggressively pushing to close the prominent loopholes enjoyed by fund managers widely. Additionally, private equity firms are being scrutinized for taking investors’ money regardless of whether or not they allocate the capital into deals. These two major issues from

Before the 2008 financial crisis many large financial firms were incapable of adequately assessing the chance that they would suffer large losses that could lead to their failure. As large firms began to suffer losses in late 2007, they made little effort to rebuild their capital buffer—either by reducing shareholder payouts or raising new equity capital—even though they easily could have

Exhibit 4 shows that over 300 Venture Capitalists out of 441 retain 20% of the profits their investments generate and the rest is in the 20/25% range except for the odd outliers at 10, 15 and 30%. Exhibit 5 indicates that the correlation with the size and age of the Private Equity organisation is rather weak and that the objectives of the funds and historical trends are no better predictors.

Private equity is an asset class consisting of equity securities in operating companies that are not public trade on a stock exchange.

Growth is usually associated with access to, and conservation of cash while maximising profitable business. People often see venture capital as the magic bullet to fix everything, but it isn't. Owners

Firms and individuals who have a lot of debt are much more sensitive to shocks in the economy. Economic booms do not last forever, most individuals will soon forget the lean times after years of prosperity, but once the wheels come off things tend to collapse every quickly. Actually, “A Minsky Moment” was coined by Paul McCulley of PIMCO, one of the world’s largest bond funds, after the Russian debt crisis of the late 1990s. Once debt reaches an unsustainable level the value of assets will begin to fall across the board. Firms will now have to pay their loans back. However, as previously mentioned at this point their operating cash flow will not be able to cover anything. They will now have to sell

Information problems such as asymmetric information and moral hazard are critical for innovative ventures, which can have a hard time forecasting future cash flow. The banks are usually less informed then the venture capitalists, which creates higher demands for returns from the entrepreneur in order to break even. (Masako Ueda, 2004, p. 601) The value added venture capitalists have a better understanding of the technical milestones and are therefore better equipped to monitor new ventures, which reduce the information problems. They may be willing to finance innovations that investors without expertise wouldn’t. Understandably, not all venture capitalist have technical expertise, but they can make up for this with a good network of experts. (Douglas Cumming, 2010, p. 307)

The easy-money policy of the Federal Reserve and the cash-swollen balance sheets of corporations and private equity firms alike contributed to an explosion of deal-making in 2015. Long term growth in vehicle production and the positive outlook for vehicle sales over the next five years have made automotive one of the leading sectors for M&A. We expect deal activity in the automotive sector to remain strong during 2016, but to taper off from 2015 levels. The biggest factor that will suppress deal activity this year is the impending interest rate increase by the Federal Reserve. Other deal-squelching factors include geopolitical instability (e.g., in the Middle East and Russia) and the relative scarcity of companies that can be purchased at bargain prices.

In above case there might be companies that are healthy and many go through period of financial distress. In particular is the threat of not being able to meet debt obligations.

Choosing the right sources of capital is a decision that will influence a company for a very long time. In 1996, the Hutchison Whampoa company is in dire need of considerable funds in order to finance their long term projects. In fact, investment analysts estimated that the company would require a minimum of US$500 million of new capital in the coming year and would face large ongoing capital needs if the firm was to remain on the growth trajectory established in recent years (Hutchison Whampoa Limited: The Capital Structure Decision, 1999).