I have a friend who is a candidate for level 3 and has posed a problem for the forum. The candidate currently works for a publicly listed diversified conglomerate with a market capitalization of over $10b in the emerging markets. The company used to be focused on food and beverage and have since transformed itself into an infrastructure firm conducting active M&A activities consistently. Let us call this firm, the Company. A large institutional investor has put in a substantial amount of equity in the company, taking up north of 80% stake. The Company currently has a diversified portfolio of companies across numerous industries such as banking, F&B, infrastructure, real estate, etc. and has grown to be the largest company in its country over the past few months, tripling its market capitalization during that period. The Company typically acquires majority stake (normally taking a public company, private) in a target company and overhauls the target’s management and value chain, among others, to increase the value of the firm. At some time, the Company may opt to divest itself of the target when it has the opportunity to realize considerable value. Now the quesiton. My friend is trying to fill up the CFA profile and does not know what to categorize the company he/she is in. Would it be considered a Private Equity firm with the AUM as the market cap of the company?
The AUM / market cap are irrelevant to whether it’s considered private equity. Private equity is a pretty broad term – the most important attribute of a “private equity” firm is that the ownership of the companies in which the firm you’re talking about invests is private (as opposed to public). What’s the answer to that? In other cases, it could definitely be considered private equity because the firm is taking majority control of companies and striving to grow them, only to eventually “divest” (or “sell”) to another acquirer or sponsor. Sounds like PE to me under these circumstances but again it all depends whether the company is taking these smaller firms (in which it has a majority stake) private.
it sounds like private equity to me. i’m not sure if you could classify it as a holding company, but the difference would be the business objective.
Thanks for the insights. For the target companies being acquired, they are often taken private as the tender offer process is undertaken almost every time. When it acquires a target company, it is typically held on for the long-term, in some cases it may even be beyond 10 years. The business objective of the Company is to overhaul the operating structure and develop whatever synergies it may squeeze out from other subsidiaries.
I might be wrong, but it sounds more like some conglomerate structure to me. 10 years is a little long for PE I believe. + The exit doesn’t really seem to be the major concern here, which I think is the central piece of PE business.
^ Of course. PE firms aren’t it it for the prestige or well-being of a company. They are in it to make the buck and get out. Employees and customers better off is just a by-product. Exit strategy is very critical, definitely not 10 years. 3-5 is more like it
3-5 years seems like it is too tight to make a substantial change in the target’s fundamentals. Perhaps, north of 5 years would be adequate for a company to realize the massive overhaul a PE firm would do in a target. In any case, I believe numi’s point about taking a target company private is the key point in determining whether a company is a private equity firm or a conglomerate. What we need to determine is what would be the primary differences between the 2.
So essentially, can a Private Equity firm also be considered a conglomerate? Can a conglomerate also be considered a Private Equity firm? What are the factors to determine the above?