It is the very nature of private equity firms to takeover businesses -- many of which are struggling in their operations -- and insert their own talent, professional expertise and financial resources to turn the businesses around. It is for this reason that many private equity firms either function entirely within or devote individual investment funds to the areas in which personnel has experience. Opportunities, however, may creep up in response to changing economic or corporate profit conditions that present investors with opportunities that they never could have anticipated. That's what a special opportunities fund is for; to take advantage of some of those out-of-the box and unforeseen market conditions that are too promising to ignore.
Before a private equity firm begins making investments, it generally must raise capital for any fund, including one that invests in special opportunities. In the third quarter of 2012, private equity firms raised U.S. $45 billion, according to a 2012 article on "The New York Times" website. Private equity firms must return any non-invested money -- or "dry powder," as it's known -- to investors after a specified time period without collecting any fees.
Liquidity, which determines how easy it will be to cash-in on an asset, is harder to come by with private equity versus more traditional funds. Once you invest in private equity, your money is generally locked up, or inaccessible, for five to seven years. Some assets or businesses are even less liquid, meaning that it will take even longer than usual to realize profits or withdraw money from the investment. In 2007, asset management firm Tudor Investments was reportedly willing to raise $18 billion for a private equity special opportunity fund specializing in less-liquid assets, according to 2007 article on "The Wall Street Journal" website.
It's not unusual for large financial institutions to have asset management divisions that might incorporate private equity investing. Goldman Sachs has an entire special opportunities unit in which in addition to making private equity investments provides financing to financial distressed, or troubled, companies. While the firm doesn't readily share performance details of this private group, the special opportunities unit produced more than 30 percent of Goldman Sachs' overall profits in 2010, according to a 2011 "BloombergBusinessweek" article.
When a private equity firm makes an investment using its special opportunities, or special situations fund as they're sometimes called, the intention is to earn the highest and fastest profit as possible. Some of the main options are to sell the business the moment a profit can be realized, separate the assets and sell them on a one-off basis to different buyers or continue to invest in the investment for a greater profit in the future. While the price that The Carlyle Group's special situation's fund paid for auto-parts company Uniboring is unknown, the private equity firm sold the investment for $400 million in 2011, which earned both the firm and investors in the fund generous profits, according to a 2012 article on "The Washington Post" website.
- The Wall Street Journal: Hedge Funds Begin to Move on Private-Equity Fortress
- Bloomberg Businessweek: Goldman Sachs's SSG: Lending or Trading?
- The Washington Post: From Carlyle’s Playbook -- How Private Equity Works
- The New York Times: More Money Than They Know What to Do With
- PEI Media: Private Equity -- A Brief Overview
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