Reply to this discussion post of at least 450 words.
The reply must incorporate at least 2 scholarly citation(s) in APA format. Any sources cited must have been published within the last five years. Acceptable sources include the textbook, scholarly peer-reviewed articles, and the Bible.
A typical private equity firm will consist of limited partners (investors) which represent pension funds, fund-of-funds endowments etc. The private equity fund would then make investments on the behalf of the limited partners. The risk and category of investments are disclosed in the funds prospectus. A private equity firm may operate various funds in order to adapt to market risk tolerance of investors. Private equity funds will target different classes of investments depending on their prospectus. One category of private equity firms are the distress capital targets. The distressed capital firm will invest in and buy distressed or failing companies. One of the more recent examples of this is the shutdown and subsequent bankruptcy of Toys r Us. Toys r Us was bought by a private equity firm due to their struggling financial position and increased liabilities. During the purchasing process KKR and Bain Capital as part of the agreement, were allowed to increase Toys R Us loan liability. This increase on loan liability caused Toys R Us to pay 400 million a year to service these debt obligations (Morgan, J., & Nasir, M. A. 2021). These debt obligations due to the private equity firm caused Toys R Us to declare chapter 11 bankruptcy in late 2017. Another form of a private equity fund is a venture capital strategy. The venture capital strategy is simply the opposite of the distressed capital strategy. Venture capital invests primarily in new entrants and startup companies early in their business life cycle. The venture capital strategy produces a positive return on investment by offering preferred financing structures, preferable share pricing, and early debt servicing. A few popular businesses that used venture capital to finance their operations until they went public is Uber Spotify and Google. Private equity funds can also construct leveraged buyout deals and often influence the merger and acquisition market. A biblical passage that illustrates the job of venture capital is in Proverbs 19:17 “Whoever is generous to the poor lends to the lord and he will repay him for his deed”. Although businesses that venture capital invests in are not necessarily poor, the firms are seeking financing options. These firms would then payback the venture capital in the form of preferential investment opportunities and increased returns.
Due to the recent increase of private equity’s involvement in leveraged buyouts the mergers and acquisition markets can be affected by the actions of price equity funds. Mergers and acquisitions can involve a private equity fund but not all deals will involve a private equity firm. A management buyout or going-private deal will not typically employ a private equity firm to complete the deal. One of the main benefits of the private equity firm’s involvement in mergers and acquisitions is the in-house services they can provide for the acquisition (Kaplan, S. N., & Schoar, A. 2005). For example, the Toys r Us deal that involved KKR and Bain Capital involved multiple business units of each firm to come to a completed deal. The deal was a form of leveraged buyout so loans had to be secured against assets and the mezzanine debt had to be created and sold to finance the operations. From debt servicing to financing these private equity firms create a cost-effective environment to close mergers and acquisition deals.
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