style="font-size:15px;"> In the context of this book, PE is defined broadly and includes venture capital (VC), growth equity and buyout funds. More about this later in the book.
2
Buyouts have accounted for more than three-quarters of industry capital deployed between 1980 and 2015. Source: Preqin.
3
Origin unknown but the quote is often attributed to Andrew Carnegie.
4
In our context, PE takes on a broad definition that includes VC, growth capital, and buyout funds. It should be mentioned that other sources might restrict the definition of PE to buyout activities and consider VC to be a separate asset class. Further, PE is frequently defined as investments in private companies but buyout activities extend to investments in and the privatization of public companies. For the sake of clarity
1
In the context of this book, PE is defined broadly and includes venture capital (VC), growth equity and buyout funds. More about this later in the book.
2
Buyouts have accounted for more than three-quarters of industry capital deployed between 1980 and 2015. Source: Preqin.
3
Origin unknown but the quote is often attributed to Andrew Carnegie.
4
In our context, PE takes on a broad definition that includes VC, growth capital, and buyout funds. It should be mentioned that other sources might restrict the definition of PE to buyout activities and consider VC to be a separate asset class. Further, PE is frequently defined as investments in private companies but buyout activities extend to investments in and the privatization of public companies. For the sake of clarity, our definition of “private” equity refers to the status of the equity stake held by the PE fund post-investment.
5
The PE secondaries market can provide liquidity for an LP wishing to sell its interest in a PE fund. This market has developed rapidly over the last decade with dedicated funds raised for the express purpose of acquiring secondary fund stakes. See Chapter 24 Private Equity Secondaries for more information.
6
A fund of PE funds (fund of funds) is a vehicle that invests in a portfolio of individual investment funds. A fund of funds offers clients diversified exposure to the PE asset class without the need for deep investment expertise or lengthy due diligence on the individual funds. An additional layer of fees applies.
7
The IC is typically a committee of the GP and makes the binding investment and divestment decisions for the fund under delegated authority from the GP (“binding” in the sense that once the IC votes, there is no other vote needed or taken).
8
GPs are usually set up as distinct special purpose vehicles (SPVs) for each fund; these SPVs serve as the GP for only one fund to avoid cross-liabilities between related funds of the PE firm. Please refer to Chapter 16 for further details on fund formation.
9
Investment managers will also be referred to as advisors or simply managers.
10
Please refer to Chapter 17 for more details on the fundraising process and its dynamics.
11
Please refer to Chapter 24 Private Equity Secondaries for further details on the mechanics behind the transfer of such LP stakes.
12
Dry powder in Exhibit 1.4 is for venture, growth and buyout investment strategies. Source: Preqin.
13
Please refer to Chapter 13 Operational Value Creation for more background.
14
Please refer to Chapter 15 for a detailed description of exit considerations and the related processes.
15
The capital invested in a deal and returned without any profits achieved, may be reinvested under the following conditions: (a) a so-called “quick flip” where an exit was achieved within 13–18 months of investing during the investment period; or (b) to match the amount of capital drawn down to pay fees, with the target to put 100 % of the fund’s committed capital to work. These rules are defined in a “remaining dry powder” test.
16
Please refer to Chapter 20 Winding Down a Fund for additional information on end-of-fund life options.
17
Please refer to Chapter 19 Performance Reporting for a detailed comparison of PE and public market performance.
18
Our Chapter 18 LP Portfolio Management takes a closer look at the challenges of deploying assets under management into PE and VC; Chapter 23 Risk Management complements the discussion.
19
Please refer to Chapter 18 for further insight into the cash management challenges LPs face when starting a PE investment program or when managing multiple funds in a PE portfolio.
20
See Chapter 19 Performance Reporting for additional detail on fund performance measurement.
21
See Chapter 21 for further details on this co-investment trend.
22
Net invested capital consists of contributed capital minus capital returned from exits and any write downs of investment value.
23
Please refer to Chapter 16 Fund Formation for a detailed description of distribution waterfalls and examples of carried interest calculations.
24
The hurdle rate, typically set at 8 %, will be negotiated during fundraising. A fund is only “in the carry” (i.e., performance incentives for the GP kick in) once it has reached an annual return of 8 %.
25
“Unicorns” is an industry term for private companies with valuations above US$1 billion.
26
Please refer to Chapter 3 Growth Equity and Chapter 4 Buyouts for in-depth discussions.
27
Chapter 19 Performance Reporting explains the dynamics of fund-level returns in greater detail.
28
Chapter 18 LP Portfolio Management discusses the decision-making process when allocating to PE in detail.
29
Please refer to Chapter 7 Target Valuation for a worked-out example on VC valuation.
30
Kauffman Foundation; ‘We have met the enemy – and he is us’; (2012).
31
Please refer to Chapter 9 Deal Structuring and to the Glossary in the back of the book for more details on the different share classes used in VC.
32
See Chapter 7 Target Valuation for further details on VC valuation techniques and a worked example.
33
Subtracting invested capital from a post-money valuation establishes the “pre-money” valuation.
34
Club deals are PE investments made by two or three PE funds; they were particularly fashionable for large buyouts during the years leading up to the global financial crisis in 2008.
35
Existing investors often participate in subsequent rounds to maintain their ownership percentage in the business and to signal both their continued support and overall health of the business.
36
More information on deal documentation can be found in Chapter 10 .
