lpc mergers acquisitions workshop 7 university of law
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University of Law (ULaw)
Legal Practice Course
Mergers and Acquisitions
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ACQ7
Private Equity
Private Equity Investment
An investment in the share capital of a private company. (MCQ topic likely)
By acquiring shares (and thereby ownership rights in a company) the investor hopes to receive INCOME from the profits
generated by that company and to make a CAPITAL GAIN from the onward sale of those shares.
The private equity FUND and PROVIDER
So, what are a private equity fund and a private equity provider?
The private equity FUND is the pool of money that is to be invested.
The fund may come from a variety of sources, such as particular individuals or companies, or from
institutional investors like pension funds, banks and insurance companies.
Specialist funds are created whereby these investors agree, usually (primarily for tax reasons) in the UK
through the form of a limited partnership, to provide funds to be invested in particular types of private
companies.
In 2017, the Government created a new class of limited partnerships – private fund limited partnerships
– which are subject to a simplified regulatory regime, making them the most suitable vehicle for the
majority of modern transactions.
The private equity fund will usually have a statement as to the type of investments for which the fund may be
used.
The investment of the money within the fund will be made by a private equity PROVIDER (or Private Equity
House).
The private equity provider makes its profit by the successful investment of private equity funds (often
through the imposition of fees based on percentage profits of successful investment returns).
It is vital for the private equity provider to undertake successful investments since, if the funds it invests
do not generate acceptable returns, the investors are unlikely to put money into funds run by that
provider again.
A private equity provider will try to maximise profit for the investors whilst at the same time minimising
the risks of the investment in order to grow its own business successfully and develop a good reputation
in the private equity market.
The decision to INVEST
Before undertaking an investment, the private equity provider will usually follow an agreed internal procedure for the
approval of the investment.
As an acquisitions lawyer working on a private equity transaction, it is important to appreciate any requirements
there may be for such internal approvals before funds are placed, as this can have a significant impact on the
timetable of a proposed acquisition.
The internal procedure will usually involve the production of an investment paper which will then be
presented to an investment committee of the private equity provider.
This paper will set out the proposed structure for the transaction and the anticipated rate of return on
the investment.
Where the funds to be provided are for a buyout, an offer for the acquisition will be made on the basis of this
initial approval, and final approval of the investment committee may also be required when the detail of the
proposed acquisition has been agreed.
The investment of the funds will often be provided through particular corporate investment structures.
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