Private Equity Financing: A Comprehensive Guide

PRESENTATION
Private Equity Financing
Private equity entails the acquisition of firms by private investors. The act is mostly
developed in the existence of a financial crisis within a business where the management
works out for the business survival. On the other hand, the investors within the business do
lookout for an exit from which they will get the chance to invest in a more profitable business
since their main interest is making profit out of their shares within a business. As a result, the
management sources for the funding from private entrepreneurs since banks cannot undertake
a risk with a non-stable business. The decision results in private equity finance where the
company is bought by a private investor who predicts that it will do better in the future
earning him or her profit. The investor develops the fee for the purchase to include the
payment for the business shares thus providing an exit to business stakeholders. After the
acquisition the ownership is transferred to the investor allowing for changes to be executed
within the business to enhance its productivity.
As seen from the case study, the Dell equity which is $ 24, 156 comprises of 30-40%
of the LBO financing. The largest percentage of LBO financing is made up of Debt. In this
case, the Dell LBO had a debt of $9,034 (is this represents the 20%-30%? If yes, then it
shouldn’t be 9034). To determine whether an investment is worth buying out, the acquisition
firm calculates the internal rate of return with a minimum of 30% but for larger deals it can
even be 20%. As it can be witnessed from the case, it is important for the acquiring company
to evaluate the risk ratio (debt-equity ratio). This is a leverage ratio which computes the debts
and liabilities against equity. For a successful LBO, the risk ratio should be greater than 1-2x
(what do you mean by 1-2x?). in the case of Dell LBO, the risk ratio is 3.6x (from where
did you get this risk ratio?). Debt to equity ratio is given the following formula; Debt to
equity ratio =total liabilities/total equity. In the case of Dell LBO
Total liabilities = $ 24,784
Total equity = $ 24,156
Debt to equity ratio = 24784/24156
= 1.1
The debt to equity ratio of 1.1 means that the business creditors and investors have an
approximately equal stake in the assets of the business, and this mean that the company
should enter into such an investment as it indicates that the company is stable with significant
cash flow generation. and the means that the company should/shouldn’t enter in such an
investment as it..... (Please continue the conclusion here whether the company should do
for such an investment based on the Debt to equity ratio or no?)