Top Private Equity Interview Preparation Guide

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Secondary investments refer to investments made in existing private equity assets. These transactions can involve the sale of private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy and hold investors. Secondary investments provide institutional investors with the ability to improve vintage diversification particularly for investors that are new to the asset class.

Infrastructure investments in various public works (e.g., bridges, tunnels, toll roads, airports, public transportation and other public works) that are made typically as part of a privatization initiative on the part of a government entity.

Limited by shares means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost.

A private company limited by shares, usually called a private limited company (Ltd.) (though this can theoretically also refer to a private company limited by guarantee), is the private limited type of company incorporated under the laws of England and Wales, Scotland, that of certain Commonwealth countries and the Republic of Ireland. It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company (plc).

An unlimited company or private unlimited company is a hybrid company (corporation) incorporated either with or without a share capital (and similar to its limited company counterpart) but where the legal liability of the members or shareholders is not limited, that is, its members or shareholders have a joint, several and non-limited obligation to meet any insufficiency in the assets of the company to enable settlement of any outstanding financial liability in the event of the company's formal liquidation. The joint, several and non-limited liability of the members or shareholders of the company to meet any insufficiency in the assets of the company (to settle its outstanding liabilities if any exist) only applies upon the formal liquidation of the company. Therefore, prior to any such formal liquidation of the company, any creditors or security holders of the company may only have recourse to the assets of the company and not to those of its members or shareholders.

Publicly traded companies are generally required to have their accounts audited by outside auditors and then publish the accounts to their shareholders. Besides the cost, this may make useful information available to competitors. Various other annual and quarterly reports are also required by law.

Publicly traded companies are able to raise funds and capital through the sale (in the primary or secondary market) of their securities, whether debt or equity. This is the reason publicly traded corporations are important prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises. The profit on stock or bonds is gained in form of dividend or capital gain to the holders of such securities.
The financial media and analysts will be able to access additional information about the business.

An investment that purchases a consistent revenue stream deriving from the payment of royalties. One growing subset of this category is the healthcare royalty fund, in which a private equity fund manager purchases a royalty stream paid by a pharmaceutical company to a drug patent holder. The drug patent holder can be another company, an individual inventor or some sort of institution, such as a research university.

Investments made in a fund whose primary activity is investing in other private equity funds.
The fund of funds model is used by investors looking for:
☛ Diversification but have insufficient capital to diversify their portfolio by themselves
☛ Access to top performing funds that are otherwise oversubscribed
☛ Experience in a particular fund type or strategy before investing directly in funds in that niche
☛ Exposure to difficult-to-reach and/or emerging markets
Superior fund selection by high-talent fund of fund managers/teams

Negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies.

Energy and power investments in a wide variety of companies (rather than assets) engaged in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution (Energy) or companies engaged in the production or transmission of electrical power (Power).

In the context of private equity this will typically refer to the riskier end of the investment spectrum including "value added" and opportunity funds where the investments often more closely resemble leveraged buyouts than traditional real estate investments. Certain investors in private equity consider real estate to be a separate asset class.

Other strategies that can be considered private equity or a close adjacent market include:
☛ Real Estate
☛ Infrastructure
☛ Energy and Power
☛ Merchant banking
☛ Fund of funds
☛ Royalty fund

Distressed or Special Situations is a broad category referring to investments in equity or debt securities of financially stressed companies.

The "distressed" category encompasses two broad sub-strategies including:
☛ "Distressed-to-Control" or "Loan-to-Own" strategies where the investor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company's equity.
☛ "Special Situations" or "Turnaround" strategies where an investor will provide debt and equity investments, often "rescue financing" to companies undergoing operational or financial challenges.

Venture capital is a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch of a seed or start-up company, early stage development, or expansion of a business.
Venture capital is sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth.

Mezzanine capital refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company's capital structure that is senior to the company's common equity. This form of financing is often used by private equity investors to reduce the amount of equity capital required to finance a leveraged buyout or major expansion. Mezzanine capital is often used by smaller companies that are unable to access the high yield market allows such companies to borrow additional capital beyond the levels that traditional lenders are willing to provide through bank loans.

Growth Capital refers to equity investments, most often minority investments, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.

A private equity is an asset class consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange.

Privately held companies generally have fewer or less comprehensive reporting requirements and obligations for transparency, via annual reports, etc, than publicly traded companies do.

In countries with public trading markets, a privately held business is generally taken to mean one whose ownership shares or interests are not publicly traded. Often, privately held companies are owned by the company founders and/or their families and heirs or by a small group of investors. Sometimes employees also hold shares of private companies. Most small businesses are privately held.

A privately owned enterprise refers to a commercial enterprise that is owned by private investors, shareholders or owners (usually collectively, but they can be owned by a single individual) and is in contrast to state institutions, such as publicly owned enterprises and government agencies. Private enterprises comprise the private sector of an economy.

An economic system that contains:
☛ a large private sector where privately run businesses are the backbone of the economy
☛ business surplus is controlled by the owners, is referred to as capitalism.
This contrasts with socialism, where industry is owned by the state or by all of the community in common. The act of taking assets into the private sector is referred to as privatization. The goal of private enterprise differs from other institutions, the major difference being private businesses exist solely to generate profit for the owners or shareholders.

A business corporation is a for-profit, limited liability or unlimited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors which hires the business's managerial staff. Corporate models have also been applied to the state sector in the form of government-owned corporations. A corporation may be privately held (that is, held by a few people) or publicly traded.

A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership. There are three typical different types of classifications for partnerships:
☛ General partnerships
☛ Limited partnerships
☛ Limited liability partnerships

A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business. This form is usually relegated to small businesses.

☛ Sole proprietorship
☛ Partnership
☛ Corporation