Summary
Summary Private Equity
- Course
- Institution
Summary of lecture notes and required reading(s).
[Show more]
Seller
Follow
jesses1
Reviews received
Content preview
Lecture 1Venture capital and Private equity = equity investments backed by private capital in unlisted
companies.
PE investors become:
1. Co-owners of companies
2. Share risk and returns to the extent in which they participate
3. Get returns directly, dependent on the growth and profitability of the investee firm
4. Realise their returns through selling their stakes in investee companies
a. Through trade sales or offerings on a stock exchange
Private Equity funds can further be (broadly) classified into:
Buyout Venture Capital (VC)
Invest significant portion of equity in a target and Investments typically made in early stage of
borrow the rest of the acquisition development, innovative, high/new tech companies
with significant growth potential
Take significant majority control in portfolio VCs take a minority stake, usual to syndicate
companies investments with other VC funds
Majority of transactions are mid-market deals (<0.5 Veto on key decisions; seats on the board
bln)
Huge waves of buyout fund raising and investing: VCs sector knowledge and strategic advice is critical
1980’s and 2004-2008
Mezzanine Distressed / Special Situations
Specialised funds that provide a specific form of Specialised funds that invest in (mainly) distressed
financing in highly leveraged (LBO) transactions. companies. Main subcategories: “distressed to
Increase overall amount of debt in transactions. control” and “special situations” or “turnaround
investment”
Mezzanine debt is a: heavily negotiated debt
instrument, structured as PIK debt, tailored to meet
financing needs of specific LBO transactions, lies in
between equity and debt in terms of risk and
expected returns, and has warrants as the form of
equity upside participation.
,Private Equity Risks
● The risks of investing in PE funds are far lower than conventional wisdom would
dictate or many investors perceive → ‘you share the losses, but get all the gains
(upside)’
● The cashflow profile is more attractive than many investors perceive, offering strong
positive cash flows from as early as two years after the first drawdown
● Concerns that there may be ‘too much money chasing too few deals’ has led to fears
about the outlook for PE returns.
, Private Equity Fees
● Most PE firms charge an (annual) management fee of 1.5%-2.5% of committed
capital, usually paid up to the sixth year
● Profits of a LP fund are usually shared on a 80/20 basis
○ There may be a hurdle rate which gives LPs preferential access to profits
when they are insufficient
Carried Interest: a share of the profits of the fund (“carry”)
PE funds will show negative returns (IRR) in the first years of portfolio construction, later
return will turn positive during the value creation and harvesting phase → “J-curve”
Origins of success
a. Selective buying (due diligence)
b. Driving the business plan
i. Keep old management
ii. Bring new management
c. Management incentives (equity stake 5%-10%)
d. Sell well
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller jesses1. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.88. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
52510 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now