Private Equity

Direct investments are the first group of items in the financial account of the balance of payments.

Direct investment – a group of items of the financial account of the balance of payments, reflecting the stable influence of an institutional unit – a resident of one economy (direct investor) on an institutional unit – a resident of another economy (a direct investment enterprise).

The influence of a direct investor is considered sustainable if he owns 10% or more of the share capital of the direct investment enterprise, i.e. more than 10% of the ordinary shares or shareholder votes (in the case of a corporate enterprise), or the equivalent of such participation (in the case of an unincorporated enterprise). It should be noted that the possession of 10% of the votes is not a strict criterion for classifying an investment as direct. Investments can be considered direct only on the basis of that a direct investor plays a significant role in the management of a given enterprise, even if he does not own its shares at all. Conversely, if an investor owns more than 10% of the shares, but does not play a significant role in the management of the enterprise, his investments are not considered direct. Direct investment transactions include not only the original direct investment transaction, but also all subsequent transactions between the direct investor and the private equity undertaking. Along with the return on invested capital, a direct investor, unlike a portfolio investor, also receives additional economic benefits, such as enterprise management, payment for administrative functions performed, etc. Individual investors can act as direct investors – individuals, groups of individual investors, incorporated and unincorporated private and state enterprises, government, public organizations, etc.

Direct investment enterprises include:

subsidiaries – enterprises in which a non-resident investor owns more than 50% of the shares; associates – enterprises in which the share of a non-resident investor is less than 50% of shares or votes; branches – unincorporated enterprises that are wholly or jointly owned by investors and directly or indirectly owned by a direct investor.

Direct investments both abroad and in the domestic economy are shown in the balance of payments as annual flows at market prices broken down into equity investments, reinvested income and other capital. Direct equity investing means the acquisition of new shares of branches, subsidiaries and associates, with the exception of non-voting preferred shares, which do not give the right to participate in additional profits. Reinvestment of income means investing back in the enterprise with foreign investment a part of the profits received by it and not distributed in the form of dividends. Direct investment in the form of other capital mainly means intra-company lending by the parent company to its subsidiaries and associates.

Some types of private equity are special cases. For example, offshore companies specializing in assembly, trade or finance, as well as enterprises created with the participation of direct investments in free economic zones, are considered residents of the countries in which they are located. Direct investments are considered to be investments of funds by individuals for the purchase of real estate abroad (villas, cottages, apartments, land). The activities of construction companies in other countries can be classified either as direct investment or as an export of services.