Skip to main content

Private Equity 4.0: Reinventing Value Creation

Private Equity 4.0: Reinventing Value Creation

Benoît Leleux, Hans van Swaay, Esmeralda Megally

ISBN: 978-1-118-93984-0

Jan 2015

288 pages

$52.99

Description

“Private equity is more economically significant than ever, as institutions hunt for high returns in a risky world. Private Equity 4.0 examines the role, workings and contribution of this important industry in a straightforward yet revealing manner.”

Dr. Josh Lerner
Jacob H. Schiff Professor of Investment Banking 
Chair, Entrepreneurial Management Unit

Harvard Business School



A multi-perspective look at private equity's inner workings

Private Equity 4.0 provides an insider perspective on the private equity industry, and analyzes the fundamental evolution of the private equity asset class over the past 30 years, from alternative to mainstream. The book provides insightful interviews of key industry figures, and case studies of some of the success stories in the industry. It also answers key questions related to strategy, fund manager selection, incentive mechanisms, performance comparison, red flags in prospectuses, and more.

Private Equity 4.0 offers guidance for the many stakeholders that could benefit from a more complete understanding of this special area of finance.

  • Understand the industry's dominant business models
  • Discover how value is created and performance measured
  • Perform a deep dive into the ecosystem of professionals that make the industry hum, including the different incentive systems that support the industry's players
  • Elaborate a clear set of guidelines to invest in the industry and deliver better performance

Written by a team of authors that combine academic and industry expertise to produce a well-rounded perspective, this book details the inner workings of private equity and gives readers the background they need to feel confident about committing to this asset class. Coverage includes a historical perspective on the business models of the three major waves of private equity leading to today's 4.0 model, a detailed analysis of the industry today, as well as reflections on the future of private equity and prospective futures. It also provides readers with the analytical and financial tools to analyze a fund's performance, with clear explanations of the mechanisms, organizations, and individuals that make the system work.

The authors demystify private equity by providing a balanced, but critical, review of its contributions and shortcomings and moving beyond the simplistic journalistic descriptions. Its ecosystem is complex and not recognizing that complexity leads to inappropriate judgments. Because of its assumed opacity and some historical deviant (and generally transient) practices, it has often been accused of evil intents, making it an ideal scapegoat in times of economic crisis, prodding leading politicians and regulators to intervene and demand changes in practices. Unfortunately, such actors were often responding to public calls for action rather than a thorough understanding of the factors at play in this complex interdependent system, doing often more harm than good in the process and depriving economies of one of their most dynamic and creative forces. Self-regulation has clearly shown its limits, but righteous political interventions even more so.

Private equity investment can be a valuable addition to many portfolios, but investors need a clear understanding of the forces at work before committing to this asset class. With detailed explanations and expert insights, Private Equity 4.0 is a comprehensive guide to the industry ways and means that enables the reader to capture its richness and sustainability.

List of case studies ix

About the authors xi

Professional acknowledgments xiii

Personal acknowledgments xv

Foreword xvii

Introduction xxi

Private equity at the crossroads xxi

An historical perspective to gain insights for the future xxi

Private equity: all about people xxiii

The best capitalism has to offer? The conceptual groundings xxiv

Empowering and incentivizing: partnering for mutual success xxiv

Focus, focus, focus xxv

Strategy is cheap; operationalizing is key xxv

Alignment brings cohesion xxvi

Flexibility as strategic value xxvi

Carrots and sticks: the value of discipline xxvi

Leverage… at all levels xxvii

The cash flow paradox xxvii

The buy-and-sell approach: capitalism on speed xxviii

Believers, sceptics and cynics xxviii

1 Private equity: from “alternative” to “mainstream” asset class? 1

Moving into mainstream 3

A brief history 6

An increasingly global industry 8

Private equity in North America 10

Private equity in Europe 11

Private equity in Asia 12

Emerging private equity players 13

An industry in the limelight 18

2 Private equity as a business system 25

Setting the stage 27

The raison d’être of private equity funds 27

Private equity’s market segments 29

The fuel behind private equity: investors 37

Portfolio allocations by investors 39

The (apparent) madness of private equity fees 42

Management fee 43

Carried interest 43

General partner interest 46

Commitments versus investments 50

Distributions in cash, please! 51

Due diligence, leverage, focus and… incentives 53

Superior information 54

Active ownership 54

Financial leverage 55

Alignment of interests 55

Mitigating possible confl icts of interest 56

Illiquidity… and new ways to cope with it 58

Secondaries market 58

Publicly listed private equity vehicles 60

3 Value creation in private equity 69

The art of private equity 71

Sourcing deals 74

Creating value in private equity 78

Operational value 79

Exiting investments 95

The economic impact of private equity 96

4 Private equity performance 103

Performance metrics 106

Valuing realized and unrealized investments 108

Reporting fund performance 109

Membership and self-reporting biases 109

Performance by segments 112

Performance by fund size 113

The persistence effect 114

The timing effect 116

Comparison against benchmarks 117

Correlation to other asset classes 121

5 The main characters in private equity 125

Size matters: fund sizes, deal sizes and other dimension issues! 127

Global alternative asset managers 132

Example: The Carlyle Group 133

Example: Bain Capital 138

Regional, domestic and multi-country funds 142

Example: EQT Partners 143

Mid-market funds 146

Example: H.I.G. Capital 148

Venture capital funds 152

Example: TVM Capital 154

Distressed private equity 157

Example: Cerberus Capital Management LP 159

Secondary funds 162

Example: Coller Capital 163

Funds-of-funds 165

Example: Pantheon 166

Example: AlpInvest Partners 169

Institutional limited partners 171

Example: CalPERS (California Public Employees Retirement System) 171

6 The supporting cast 173

London as European centre of gravity 176

The private equity ecosystem: follow the fees 177

Investment banks 178

M&A advisory fees 179

Arrangement fees 180

Securitization fees, or the price of turning frogs into princes 180

Fund management fees, or how to compete with your best clients 182

Lending banks 183

Accountancy firms 184

Law firms 185

Due diligence specialist providers 186

Strategy consultants 187

Placement agents 189

Fund administrators 190

Recruitment consultants 191

Public relations agencies 192

7 Investing in a fund 195

The private equity game 197

The decision to invest 198

Choice of investment vehicle 203

Direct fund investments 204

Indirect fund investments 204

Diversification in a rich marketplace 209

Stages of investment 210

Geographic focus 210

Sector and size of investments 210

Strategic approach 210

Types of private equity firms 211

Timing 211

The pitch 212

Manager selection 214

Due diligence 216

Terms, conditions and fee structures 221

Subscription to a fund 228

Capital calls 228

Monitoring 229

Distributions 230

Reporting 232

Fund liquidation 233

8 The future of private equity 235

Reports of private equity’s death were highly premature 237

Private equity in a changing world 239

Conclusion 244

Index 247