Lecture 5

Question 1

IRR, MoM and PME

Answer 1

 As technically speaking IRR is not a rate of return but rather the annual rate of growth an investment is expected to generate, focusing solely on this metric can be misleading. For example, high early returns will result in exaggerated returns
 Being complemented by the money multiple (aka cash-on-cash / c-o-c or multiple-of-money / m-o-m), and despite this tool not accounting for the time value of money, the performance analysis becomes more robust
 Phallipou advocates benchmarking vs. PME (Public markets equivalent)  to more prodfoundly assess relative performance of PE funds
o PME adapts public market returns into an IRR-like metric that accounts for irregular and fluctuating cash flows which is designed to give investors more of an apples-to-apples comparison between private market funds and public benchmarks
o All of them are trying to answer a key question: are PE returns superior to public market returns? Most evidently: views on that point differ materially depending on the perspective

Question 2

Private Equity trends

Answer 2

1. P2P (public-to-private) deals have began to rise  without the public light
2. Larger companies are becoming PE targets again
3. Tech & Healthcare PE’s have risen in number and importance
4. PE has become more diverisifed, with many players branching out (Blackstone has widened its portfolio since its IPO) Same with Apollo, Carlyle and KKR

Question 3

continuation fund

Answer 3

• Can be useful if asset cannot be sold for the desired value (market downturns) or they still have value creation which would be left on the table
• Effectively what happens is that the General Partner sells the asset from one fund that it runs into another fund that it runs. This is called a GP-led transaction
• Naturally, by being the seller and the buyer, there is an inherent conflict which must be addressed carefully and can be win/ win for all constituencies involved: the GP, the selling LPs, the rolling LPs, the new investors and also the target company itself
  o It is recommendable to involve the LPs (usually via the LP Advisory Committee) and mandate an advisor to ensure arms-length terms and conditions of the proposed deal. Valuation obviously is a key aspect.

Question 4

LP co-investments

Answer 4

 Another adjacent strategy to allow the fund’s LPs to co-invest (usually not more than 30% of total equity ticket per deal) alongside the GP free of management fee
 It is not uncommon that a GP allows an investor which is not an LP yet to co-invest, precisely with a view of bringing them on board for the next fund

Question 5

J curve

Answer 5

Question 6

Waterfall

Answer 6