DescriptionUnfairly reviled, and much misunderstood, private equity differs from all other asset classes in various important respects, not least the way in which its fund mechanisms operate, and the way in which its returns are recorded and analysed. Sadly, high level asset allocation decisions are frequently made on the basis of prejudice and misinformation, rather than a proper appreciation of the facts.
Guy Fraser-Sampson draws upon more than twenty years of experience of the private equity industry to provide a practical guide to mastering the intricacies of this highly specialist asset class. Aimed equally at investors, professionals and business school students, it starts with such fundamental questions as ’what is private equity?’ and progresses to detailed consideration of different types of private equity activity such as venture capital and buyout.
Rapid and significant changes in the environment during the recent financial crisis have prompted the need for a new edition. Separate chapters have been added on growth and development capital, as well as secondary investing. Newly emergent issues are considered, such as lengthening holding periods and the possible threat of declining returns. Particular problems, such as the need to distinguish between private equity and hedge funds, are addressed. The glossary has also been expanded. In short, readers will find that this new edition takes their understanding of the asset class to new heights.
Key points include:
- A glossary of private equity terms
- Venture capital
- Growth capital
- Development capital
- Secondary investing
- Understanding private equity returns
- Analysing funds and returns
- How to plan a fund investment programme
- Detailed discussion of industry performance figures
1 What is Private Equity?
What is Private Equity?
Fund investing versus direct investing.
Different types of Private Equity investment.
2. What are Private Equity Funds, and How do They Work?
Capital: Allocated, Committed, Drawn Down and Invested.
How do Private Equity Funds Work?
Private Equity Funds Distinguished from Other Fund Types.
Private (Equity) Real Estate.
A Note on International Issues.
3. Private Equity Returns – The Basics.
Understanding the J-curve and Compound Returns.
Upper Quartile Figures.
Using Vintage Year Returns for Benchmarking Purposes.
4 Private Equity Returns – Multiples and Muddles.
Distributed over paid in (DPI).
Paid in to committed capital (PICC).
Residual value to paid in (RVPI).
Total value to paid in (TVPI).
Use of multiples in industry research.
Muddles, Muggles and Markowitz.
Types of Buyout Transaction.
Take Private (P2P).
Other 'Buyout' Activity.
How do Buyouts Work?
Characteristics of Buyout.
Barriers to entry.
6 How to Analyse Buyouts.
Multiple increase (sometimes called multiple arbitrage).
Modelling and Analysing Buyout Funds.
7 Buyout Returns.
US versus European Buyout.
Buyout skill bases.
Contribution of different drivers.
8 Venture Capital.
What is Venture Capital?
Backing New Applications, Not New Technology.
Classifi cation by Sector.
Classifi cation by Stage.
Mid and late stages.
9 How to Analyse Venture.
The Fundamentals (1) – Money Multiples.
The Fundamentals (2) – Valuation.
Valuation as an element of stated returns.
Differences in valuation approach between Europe and the US.
Variability of Venture valuations.
Pre-money and post-money valuations.
The Fundamentals (3) – Cost and Value.
IRRs and multiples.
Going in equity (GI%).
Percentage of the holding within the fund.
The Impact of Home Runs.
10 Venture Returns.
US Outperformance versus Europe.
Money multiples drive IRRs.
Home runs and the golden circle.
European Venture – Is it as Bad as it Seems?
Returns and Fund Size.
Venture returns by stage.
What of the Future?
11. Growth and Development Capital.
The PLC and the BCG Growth Matrix.
Money in deals.
Money out deals.
Growth capital and late-stage Venture.
12. Secondary Private Equity Fund Investing.
Why do People Buy Secondaries?
Time and the J-curve.
Diversifi cation by time.
Diversifi cation by geography and sector.
Treasury and Portfolio Secondaries.
Why do People Sell Secondaries?
Change of strategy/leaving the asset class.
Overconcentration by time, sector or geography.
Unexpected need for cash.
Dissatisfaction with the GP.
Restrictions on Transfer.
Secondary Buyouts - Warning.
13. Due Diligence.
Funds of Funds.
Growth and Development Capital.
Monitoring Private Equity Funds.
The Changing Nature of Due Diligence.
14. Planning Your Investment Programme.
Cash Flow Planning.
Allocated, Committed and Invested Capital.
Diversifi cation by Time.
Proper Commitment Levels.
Diversifi cation by Sector and Geography.
How to deal with uninvested capital.
Towards a New World of Private Equity Programmes?
15. Trends and Issues.
Private Equity at a Crossroads?
Glossary of Private Equity Terms.