Below is the extract form the secret source. it seems that the cost of debt for private equity is higher than the public? to my knowledge , it is lower. please add some comments.
Availability and cost ofdebt: A private firm may have less access to debt financing than a public firm. Because equity capital is usually more expensive than debt and because the higher operating risk of smaller private companies results in a higher cost of debt as well, WACC will typically be higher for private firms. Acquirer versus target: When acquiring a private firm, some acquirers will incorrectly use their own (lower) cost of capital, rather than the higher rate appropriate for the target, and arrive at a value for the target company that is too high.
Cost of debt is higher for private equity. Private equity firms are usually more risky, operationally. Also, their debt is usually less liquid. Also, investors would have less information on them, which would make the investment more risky as well.
An additional note, this leads into one of the values that a venture capital firm can add to the investment, i.e. a lower cost of debt.
think you’re confusing debt rates for private equity companies, ie Bain/Carlye Group, vs actually private company debt. debt for a pvt company will generally be more expensive than their public counterpart, however, i’d be curious to know how much it costs pvt equity cos to access debt markets…
it is so contradictory . below is the extract from secret source also. so it is easy for Private equity to finance cheap debt? so confused
It is commonly believed that PE firms have the ability to add greater value to their portfolio companies than do publicly governed firms. The sources of this increased value are thought to come from the following: 1. The ability to re-engineer the firm and operate it more efficiently. 2. The ability to obtain debt financing on more advantageous terms. 3. Superior alignment of interests between management and private equity ownership. Control Mechanisms
yes, in most cases Pvt Eqy companies can obtain cheaper debt financing than public/pvt cos they are taking over/reengineering
Yeah but if you are evaluating a target to deterimine a fair price you would want to use their cost of equity, the fact that the PE firm can get better debt is baked into the profit realized once the firm is bought, not before hand. A simple way to think about it is that you buy a firm for 100, and via cheaper debt that you have access to, value it at 120. If you value the firm at your debt initially, the price would be higher and you wouldnt realize the benefit of access to cheaper debt.
PRivate equity firm == private firm. PE can have billions of dollar backing it up, while a private firm could just be a mom and pop store.
It seems to me Private Firm and Private Equity Firm here refers to the same?
Pleaase add comments
private firm = “passcfaforsure lemonade stand”
p/e firm = KKR, Blackstone, etc
Please add more comment the difference between private firm and private equity firm. so confused.
Private Firm = Not a pulblicly traded company. Privately Owned.
See more on Private Equity here: http://www.investopedia.com/terms/p/privateequity.asp#axzz1vijnyBAy
The bottm line : Private firm get expensive debt financing while Private equity get cheap debt financing. why?
Please add some comments