What is a buy-out fund

Private equity investments typically fall into three main categories:

  • Buy-out: Majority investments in mature enterprises with an established business concept and an earnings capacity allowing a takeover partly based on loan capital. Today this category represents the largest part of private equity.
  • Venture capital: Typically start-up capital for small-growth companies.
  • Other: Includes “special situations”, ie investments relating to eg reorganisation, mezzanine capital, investments in infrastructure, properties and secondary private equity portfolios.

SPEAS invests primarily in the so-called buy-out funds; the main activity of a buy-out fund is development of its portfolio companies through active ownership with a view to maximising returns for the fund’s investors. Buy-out transactions are often characterised by the following:

  • A private equity fund purchases a company and finances a – usually relatively high – part of the purchase price through loans.
  • The private equity fund usually has an investment horizon of three to seven years.
  • The buy-out often takes place in cooperation with the company’s existing management, a new management or together with the company’s employees.
  • The private equity fund establishes an incentive scheme for the management of the acquired company, ensuring common interests of the management and the fund.
Ownership through a buy-out fund combines the advantages of the decision-making power of a single proprietorship with the listed company’s access to capital.

A portfolio company owned by a buy-out fund typically has access to ample capital from the fund and may thereby optimise its capital structure. The portfolio company also gains access to the buy-out fund manager’s competencies and network of experienced advisers and executives within the particular field. These factors contribute to adding value to the portfolio company to the benefit of the investors of the buy-out fund.