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What is Private Equity?
Introduction to the Basics
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Understanding Private Equity
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• The Basics– Private equity is an asset class
– Private equity is a source of investment capital
– Enables those with high net worth to invest in private companies
• Overall goal– Achieve attractive rate of return for investors
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Private Equity (PE) Strategies
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• Leveraged buyouts
• Venture capital
• Growth capital
• Mezzanine capital
• Distressed investing
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Leveraged Buyout (LBO)
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• PE firm buys majority stake in mature business– Uses financial leverage
• Debt is serviced using operating cash flows from purchase
• Popularized by firms in the 1980’s
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Venture Capital
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• Subcategory of private equity
• High net worth & institutional investors– Inject capital into
start-up & early growth companies
• Investments can be further divided– Early-stage
• Start-up companies
– Later stage• Company already
generating cash flow• May even be
profitable
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Growth Capital
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• Injection of cash– Relatively mature companies
that are generating revenue
– Funds to expand or restructure operations
• Can also be used to reduce debt on balance sheet
• Often a minority stake vs. controlling share
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Mezzanine Capital
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• Subordinated debt or preferred equity shares– Represents most junior portion of company’s
capital structure– Senior to company’s common shares
• Often used to reduce equity capital needed to finance a LBO
• Used by smaller companies when unable to access other capital
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Distressed Debt
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• Special situation‒ Investing in debt of company with serious
financial problems• “Distressed-to-control” strategy
– Acquiring debt in hopes of taking controlafter restructuring
• “Special situations” or“turnaround” strategies– Provide capital to help rescue
restructuring company
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How Does PE Work?
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Analyze business with focus on EBITDA (earnings before interest, taxes, depreciation & amortization)
Upon agreement to pursue acquisition, propose offer
Conduct thorough due diligence
No major obstacles…transaction proceeds
DEAL FLOW
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Passive vs. Active Investors
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• Passive– Rely on existing
company management to grow business & improve profitability
• Active– Take over company
management after purchasing controlling shares• Provide expertise,
contact network & operational support
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Exit Strategies
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1. Sell business at higher price than paid2. Sell or merge the business with a
strategic buyer3. Recapitalization: cash distributed to
PE investors– Via cash flow or by issuing debt securities
4. Initial public offering (IPO) of stock to the public market
Overall goal: achieve attractive return for investors. How to monetize efforts?
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Private Equity Firms
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• Who are the major players?– 1000’s of firms actively managing PE funds– Ranking typically based on amount of capital
raised• Private Equity International
– Industry publication– Compiles annual ranking of top 300 PE firms
in the world• Based on amount of direct-investment capital
raised over 5-year window
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Top 20 PE Firms
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Source: PEI Media
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Geographic Distribution
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N. America53%Europe
27%
Asia/Other20%
% of PE Firmsby Geographic Location
Source: Prequin (www.prequin.com)
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PE Jobs
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• PE investing has grown in past two decades
• Represents 5 – 15% of many high net worth investor & institution portfolios
• PE professionals bring unparalleled management experience, resulting in:– Greater productivity, efficiency & profitability
Attracting the Best and the Brightest
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