Who are the Participants in Capital Markets?

In order to understand why private equity funds are sprouting globally, here is a basic primer about capital markets.³ There are three capital markets that profit-oriented organizations can tap to fuel their growth:

1. Public capital markets - These are the stock exchanges, such as the New York and London Stock Exchanges, where individuals like you and I as well as investment managers of mutual and pension funds and university endowments can invest along with others in publicly traded companies. Investors will always bear some risk, but broad participation by constant buyers and sellers typically moderates turbulence in stock price changes. Stock exchanges are also where new companies raise funding through initial public offerings (IPOs)
2. Internal capital markets - This is where operating divisions within a parent company, such as Procter & Gamble, are provided cash by senior executives at the parent's headquarters. In effect, divisions compete for the parent's limited funding by submitting proposals supported by justifications that estimate the financial returns they can generate from the funds. In short, this how financial resources are allocated within a conglomerate.
3. Private capital markets - This is the emerging player. You may recognize the four major types of participants as angels (primarily individuals), venture capitalists (investors betting on entrepreneurs), private equity funds and hedge funds. One differentiator of private capital markets is they are not burdened by compliance with government and public stock exchange regulations and laws.

From these descriptions, you can see that managers of private capital markets are freer to identify investment opportunities and flexibly shift funds in those directions. As a result, they can more quickly produce higher financial returns than public and internal markets. Consequently, they are attracting insurance, university endowment and retirement pension fund managers to supply them with capital. Global liquidity available for investing is at record-high levels,⁴ and managers are chasing the highest risk-adjusted returns.