30 May /18

Private Equity

Private equity - Word of the day - EVS Translations
Private equity – Word of the day – EVS Translations

If there way a plausible way to “hide” USD 3 trillion in assets in plain sight, this would likely be the best way to do it. In market terms, it would be the equivalent Apple, Amazon, Microsoft, and (part of) Google merging and the global market basically saying nonchalantly, “Hmmm… I wonder what else is happening.” Often thought of as strictly the realm of millionaires and billionaires, today’s financial term private equity is far from the imposing and confusing image that most people conjure when thinking of it.

Essentially, private equity is simply shares of ownership that are not publicly traded or listed on a stock exchange. In practice, the scenario that often occurs is that a private company will buy a publicly-listed company, which will them become a private entity. Typically this occurs because the private company sees a potential unexplored value in the purchased company and hopes to gain a return on the investment.

Etymologically, this compound word can be a little tricky. The first word, private, coming from the Latin privatus, simply refers to the fact that something is ‘set apart or not open to the public’, and was first used in that context circa 1398, in John Trevisa’s translation of Batholomeus Anglicus’ De proprietatibus rerum (On the Order of Things), stating that: “The private way is suitable to the near town and is short and near and often grown with grass.” The second word, equity, which usually means ‘fair or equal’ and comes from the Latin aequitatem, is, in this usage, meant as the net value of an asset (if you prefer, this also creates equality in the basic accounting equation), and was first used in this sense by Edward Sherwood Meade in a 1904 article in Political Science Quarterly, writing that: “Its preferred stock is quoted at..prices which indicate a general conviction that the equity in the company is worth little.”

Though it has a reputation for attracting large capital firms and high net worth individuals, private equity is a lot more common than it may seem-  and it can make good investment sense. For example, private equity is a leading employer: the five largest regional private equity firms are (combined) the second largest employer in the United States; the largest employer in Europe; and the fourth largest employer in the Asia-Pacific region. Through participation in specific retirement plans, many North American employees – especially public employees – pay into private equity entities which invest funds in publicly-traded companies; so, if you’re a public employee, you’re likely already part of a private equity program. Finally, given that private equity companies are not limited – like a single public company would be-  they can have a broader criteria for investment, and, along with their experience in a specific economic sector, this can lead to more opportunities to provide a better return to investors.