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2023 Curriculum CFA Program Level I Alternative Investments
Introduction
Private capital is the broad term for funding provided to companies that is sourced neither from the public markets, such as from the sale of equities, bonds, and other securities on exchanges, nor from traditional institutional providers, such as a government or bank. Capital raised from sources other than public markets and traditional institutions and in the form of an equity investment is called private equity (PE). Similarly sourced capital extended to companies through a loan or other form of debt is referred to as private debt. Private capital relates to the entire capital structure, including PE and private debt.
Private capital largely consists of private investment funds and entities that invest in the equity or debt securities of privately held companies, real estate, or other assets. Many private investment firms have PE and private debt arms; however, these teams typically refrain from investing in the same assets or businesses to avoid overexposure to a single investment and to avoid the conflict of interest that arises from being invested in both the equity and debt of an issuer. Private investment firms, even those with private debt arms, typically are referred to as PE firms. Although PE is the largest component of private capital, PE as a comprehensive generic category is inaccurate because other forms of private alternative finance have grown considerably in size and popularity.
Learning Outcomes
The member should be able to:
- explain investment characteristics of private equity,
- explain investment characteristics of private debt,
- explain investment characteristics of real estate,
- explain investment characteristics of infrastructure,
- explain investment characteristics of natural resources, and
- explain investment characteristics of hedge funds.
Summary
- Private capital is a broad term used for funding provided to companies sourced from neither the PE nor public debt markets. Capital provided in the form of equity investments is called PE, whereas capital provided as a loan or other form of debt is called private debt.
- PE refers to investment in privately owned companies or in public companies intended to be taken private. Key PE investment strategies include leveraged buyouts (e.g., management buyouts [MBOs] and management buy-ins [MBIs]) and venture capital. Primary exit strategies include trade sale, initial public offerings (IPO), and recapitalization.
- Private debt refers to various forms of debt provided by investors to private entities. Key private debt strategies include direct lending, mezzanine debt, and venture debt. Private debt also includes specialized strategies, such as collateralized loan obligation (CLOs), unitranche debt, real estate debt, and infrastructure debt.
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