These companies include startups venture capital midsize companies seeking to

These companies include startups venture capital

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These companies include startups (venture capital), midsize companies seeking to expand (expansions), midsized companies or divisions of companies being sold off (buyouts or ins), and companies in financial distress (vulture capital) . Private equity is a very expensive form of external financing, as the original owners must compensate
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investors for the substantial costs of screening and monitoring and must give up control over their company. - Only sought if company needs funds but is unable to borrow enough and cannot obtain equity financing in public market - Need an exit strategy: if made in limited partnership, investment has to be liquidated by the time partnership ends; once private equity investor does what they can do for a particular company, should move on and apply expertise elsewhere 5. Does private equity make sense in developing countries like China and India? How do the financial systems there differ from those in the US in ways that would make private equity relatively more attractive? There is little available capital and what is available is very expensive, but the economies of these countries are growing quickly. The markets are large enough, have fast growing businesses, and have reasonably robust public markets for exit. Expansion is the biggest opportunity in India, as start ups are generally too small and investors want some control but not too much due to the complexity of the economy. Venture and buyouts are more popular in China. Investors are attracted by the possibility of making even more money. Many private companies are in businesses serving China's growing middle class, they are small but growing by perhaps 20% a year, twice the pace of the economy, and produce 60% of GDP; they are starved of finance, which state banks are unwilling to offer. There is also a lack of skilled managers in these countries. - The markets of these countries have much less competition than the private equity markets in the US or developed countries. - However, it may be hard to get money out of the country. There are problems like corruption, poor corporate governance, a weak rule of law and fraud as well. - Usually hard to get financing -> willing to take private equity 6. What can the governments of such countries do to encourage private equity investment? What are the needs of private equity in terms of other components of the financial system? Governments can encourage private equity by dealing with corruption, poor corporate governance, weak rule of law, and fraud. A private equity investor needs a public market for exit, and needs to be able to get the money out of the country afterward. Further, there must be competent workers and managers, and the economy must be able to support the corporations. Regulations and tax laws are important for the supply of investors, and the ease of exit is especially important. In many countries there is a lack of potential investors in private equity intermediaries, a lack of suitable legal and tax framework, a lack of good exit mechanisms, and a combination of the above. - Need a lot of investors - Need limited partnerships, need possibilities of exit - IPO, bought by another company in the industry - Company might be located in America -> foreign ownership
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