The hedge fund and private equity capital raising environment in EU Essay

The hedge fund and private equity capital raising environment in EU - Essay Example Most hedge funds establish and organize themselves as limited partnerships because of the flexibility that it allows them. In order to withdraw funds investors have to give notice of 30 days or more. There are approximately 7,000 hedge funds with market values of US$1 trillion. According to McCaherty and Vermeulen (n.d.) hedge funds take a variety of forms and are characteristic of the pursuit of high returns and the use of leverage to enhance the return on their investment. In recent times hedge funds and private equity have come to represent a significant part of financial activities in the financial markets in Europe, USA and Asia. The sizes of these investments are large as they continue to grow. Fund managers use a number of strategies, traditional techniques and a number of instruments such as equity, debt, options, futures and foreign currencies. In recent times hedge fund managers have engaged in high risk investment strategies including currency trading, credit derivatives a nd restructurings in order to obtain above normal returns on their investments Private Equity Private equity fund managers invest mainly in unregistered securities. However, in recent times they have been engaged in taking private a number of publicly listed companies. They use a number of different investment strategies with varying levels of liquidity. Private Equity Firms are not only involved in providing funds for new and developing companies but they are also engaged in the provision of funds for corporate restructuring, management buy-out and leveraged buy-outs. One Writer attributes the emergence of the buyout fund as the dominant style of investment to favorable credit market conditions, a large supply of loan funds and low interest rates, changes in the preferences of investors, a large number of publicly listed private equity vehicles and the increase in the demand for alternative assets by institutional investors such as pension funds. Brigham and Ehrhardt (2005, p. 664) indicates that â€Å"in a going private transaction the entire equity of a publicly held firm is purchased by a small group of investors that usually includes the firms current senior management.† There are usually two ways in which this transaction is carried out. In one instance the managers acquire all the equity of the company and in the other it does so with a small group of investors who set the previous managers to manage. These are referred to as management buy-out (MBO) and management buy-in (MBI) respectively. This process normally involves substantial borrowings and is therefore described as Leveraged buyouts (LBO). Another term which is normally used is â€Å"taken private† which relates to a buyout of a public company and in the process removing it from the stock exchange listing, and therefore transforming it into a private firm (Fraser-Sampson, 2007). Public companies are normally taken private because they have the potential of providing substantial ca sh flows to investors as the shares are currently undervalued on the stock market. The managers see the potential of â€Å"significantly boosting the firm’s value under private ownership† (Brigham and Ehrhardt 2005, p. 664). This means that companies taken private have the potential of enriching not only the managers who take part in the buyout but the public shareholders who are often offered prices higher than the going market