Definition: Private equity is private ownership, as opposed to stock ownership, of a corporation. Private equity stakes in a corporation are usually sold by private equity firms. Firms can sell these stakes not only to private investors, but also to government and pension funds, as well as hedge funds. The money raised by these firms are called private equity funds. These include cash and loans, but not stocks or bonds.
According to Prequin.com, $486 billion of private equity funding was raised in 2006. (Source: Prequin, Private Equity Spotlight October 2007) This additional capital took many public corporations off the stock market, thus driving up the share prices of those that were left. In addition, private equity financing allowed corporations to buy back their own shares, also driving remaining share prices up.
Many of the loans that banks make to the private equity funds are then sold as CDO's (collateralized debt obligations). The result is that:
- The banks don’t care if the loans are good or not, because someone else is stuck with the bad loan.
- The impact of these loans going sour will be felt in all financial sectors, not just banks.
The excess liquidity created by private equity was one of the causes of the 2007 Banking Liquidity Crisis.
Examples:
One of the largest private equity funds is the Blackstone Group.
